For most Texans, their home is their most valuable asset. It's valuable both financially and emotionally. That is why the uncertainty of what will happen to your home after a divorce can be stressful and worrisome. In this article, we will review the various ways a residence can be divided at the end of a divorce.
The first question you may have is, "Who decides how the home is divided?" As with almost any other issue in a divorce case, the court will decide after a trial if you and your spouse can't reach an agreement. Keep in mind that all the options discussed in this article are options you and your spouse can agree to during mediation or in a settlement agreement.
Whether your home is community property or separate property will have a big impact on how your home can be divided. Basically, separate property is any property: (1) owned or claimed before marriage or (2) inherited or received as a gift during marriage. Community property is any property acquired during marriage that isn't separate property. The courts have the power to make a "just and right" division of community property during marriage. That means a court can award community property to either spouse in a way the court believes is fair. This article won't discuss how a court decides to award a community property home. Instead, we will focus on the ways in which a court can award a community property home by using the example of fictional couple John and Mary.
John and Mary married in 1986 and purchased a Houston home in 1988. John and Mary decide to divorce in 2014. At the time of the divorce, John and Mary's home is fully paid off and worth $250,000. Because John and Mary purchased their home during their marriage, their home is community property. After a trial, the court decides that all of John and Mary's community property should be split 50/50 since neither John nor Mary is more to blame for the end their marriage. So how can the court award the home?
The court can always award the home to one party and give the other party something of equal value. Because the home's equity is $250,000, the court can award the home to John and give Mary $250,000 of other community assets. But what if there isn't $250,000 of other community assets? Pushing our fictional couple further, let's assume John and Mary fell on hard times before their divorce. Their bank accounts are nearly empty and besides their used cars and home, they don't have much else. Then the court can't get to a 50/50 split by simply awarding either John or Mary the house, and it's not practical or a good idea to leave John and Mary as co-owners of the home after their divorce. In this situation, the court can still award the home to John and grant Mary an owelty of partition lien for $125,000.00 on the home. With an owelty of partition, Mary is legally lending John $125,000.00 to cover her one-half interest in the home, although no cash is actually exchanging hands. John has to pay off the $125,000.00 to Mary over time and with interest. Just like a mortgage, Mary's loan is secured with a lien on the entire residence. So, if John stops making payments, then Mary can foreclose on the house.
What if neither Mary nor John wants to keep the house? Or more likely, what if neither Mary nor John wants the other person to have the home? In this situation, the court can order that the home be put up for sale and the proceeds of the sale be split between Mary and John. This is a workable alternative, but it requires significant planning because selling a home at a price the sellers want is never a sure thing, especially if the sellers just divorced. The court will need to work out: (1) how the sales price will be determined, (2) how long the sale will go on, (3) who will actually do the showing and negotiating, (4) who will pay the house's expenses until it's sold and will they get a credit for those expenses, (5) if the house is sold, the way in which the proceeds will be distributed, and (6) if the house isn't sold after a set date, what the parties will do next.
The issues with a separate property home are very different than with a community property home. Courts cannot divide separate property during divorce. A spouse's separate property is theirs to keep. The only real issue with a separate property home is a claim for reimbursement by the community estate or the other spouse's separate estate. Reimbursement is when one of the three marital property estates (community estate, husband's separate estate and wife's separate estate) ask for reimbursement from another estate for benefits provided. We will use the fictional couple of Dave and Alice to cover a common reimbursement claim involving a separate property home.
Dave purchased a Houston home with a mortgage in 1987 and married Alice in 1988. Dave and Alice lived in the home throughout their entire marriage. During the marriage, Dave and Alice used their earnings to pay off the mortgage on the home, a total principal balance of $300,000 and interest of $100,000. Dave and Alice decided to get divorced in 2014. The home is Dave's separate property because Dave bought it before marrying Alice. However, all the money Dave and Alice earned during their marriage is community property. So, the community estate spent $400,000.00 on Dave's separate property home. Because the home is Dave's separate property, the court can't award the home to Alice. However, when Dave and Alice file for divorce, Alice can ask that the community estate be reimbursed for the $300,000.00 of principal it reduced on the mortgage for Dave's home. The law doesn't allow Alice to ask for reimbursement for the $100,000 payments of interest. So in practical terms, Alice's claim for reimbursement means Alice wants an extra $150,000.00 of the community property. One way the court can deal with this is by awarding Alice an equitable lien on Dave's separate property home covering the $150,000.00. Dave will then have to pay back the $150,000.00 to Alice over time with interest or Alice can foreclose on Dave's house.