I have written before that in the case of intestacy, the characterization of property as separate or community dictates how and to whom it is distributed. It also affects which property you can dispose of in a Will at your death.
But how does one distinguish between which property is community and separate? The following is an explanation of how property is characterized in Texas.
Characterization of Property
In Texas, all property is classified as community or separate property depending on when and how it was acquired.
Property acquired before a marriage is classified as separate property, while property acquired during a marriage is presumed to be community property, except if acquired by gift, devise or descent, or you agree otherwise (I’ll explain in a future post).
Property retains the classification as separate or community regardless of whether it is converted to cash or back again. So for example, if you sell a home that was your separate property, the proceeds from that home will be separate even though you sold the property while you were married. Or if you receive an inheritance while you are married, the inheritance would be separate property.
However, if you want to retain the separate nature of that property, it’s important that you don’t commingle the property with community property. Otherwise it may be difficult to “trace” the property in a way that proves that it is separate property.
Distinguishing Between Community Property and Separate Property
The following property is classified as community property:
- Income either spouse earns during the marriage
- Property purchased with income earned during the marriage
- Dividends, interest, and capital gain earned on community property
- Dividends and interest earned on either spouse’s separate property during the marriage
Separate property includes any of the following:
- Income earned by either spouse before the marriage
- Capital gain on separate property, such as appreciated stock
- Any property acquired by gift or inheritance
- Personal injury damages for an physical injury sustained, even while married (except for lost wages which are community property)
So for example, if you owned a condominium before you were married, and rented the condominium out after you were married, the rental income would be community property. However, if you were to sell the condominium after you were married, the proceeds of the sale would be separate, assuming you don’t commingle the proceeds with community property in a way that makes them untraceable.
Can Property Be Separate and Community at the Same Time?
It’s possible for property to be characterized as both separate and community. For example, suppose you purchase a home during your marriage for $200,000 and use the proceeds from the sale of separate property to put down a down payment of $50,000, 25 percent of your home would be your separate property. However, if you make mortgage payments out of income earned during your marriage, a portion of the home would be owned by the community.
The distinction between separate and community property can get a bit confusing at times but is very important in determining how property is distributed at death.