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What is the difference between separate and community property?
In dividing property between spouses in a divorce, the court must categorize all property as either separate or community. Separate property goes to the owner and community property is divided in a just and right manner. See Tex. Fam. Code§ 7.001 et seq. But what is separate property? What is community property? The code states that a spouse’s separate property is that which was owned before the marriage, was acquired by gift (even if it was the other spouse giving it) or through an inheritance during the marriage, or was recovered through a personal injury action from injuries sustained during the marriage. Simple, right?
Well, no. There are a few quirks to this general rule.
Through the course of a marriage and the lifetime of a piece of property, things will get sold and replaced. “Property acquired in exchange for separate property becomes the separate property of the spouse who exchanged the property.” Ridgell v. Ridgell, 960 S.W.2d 114, 148 (Tex. App.—Corpus Christi 1997, no pet.). Or, put simplistically, if a spouse trades in a sports car that he had before he got married for a minivan, the minivan is still his. “[S]eparate property begat separate property.” Id. at 150. The party seeking to prove the property in question was exchanged for separate property bears the burden of proving it through a process called “tracing.”
While some items will depreciate or be discarded or exchanged, others will grow in value or produce income. The general rule is that income or earnings from separate property is community property. See generally Benavides v. Mathais, 433 S.W.3d 59, 63 (Tex. App.—San Antonio 2014, pet. denied). “This is usually true regardless of the nature of the separate property, whether the separate property generating income is stock or shares in a corporation, a trust, real estate, livestock, or other assets.” Alsenz v. Alsenz, 101 S.W.3d 648, 653 (Tex. App.—Houston [1st Dist.] 2003, pet. denied).
Yet of course there are quirks to this general rule as well. For example, gifts between spouses. “If one spouse makes a gift of property to the other spouse, the gift is presumed to include all the income and property that may arise from that property.” Tex. Fam. Code§ 3.005. Thus if one spouse gives the other stock or a piece of jewelry, the increase in value is part of the gift and thus the separate property of the receiving spouse. Another exception is oil and gas royalties from wells on separate property. Alsenz, 101 S.W.3d at 653.
While the law encourages spouses to come to agreements concerning the division of property and debt in a divorce—see generally Tex. Fam. Codeat § 7.006—such agreements are best made with knowledge of a spouse’s rights to property. As explained above, the difference between separate and community property is full of general rules but hidden exceptions. Thus even those who want to avoid court would benefit from the advice of experienced counsel in reaching a just and right division of the marital estate.