Divorce and Real Estate in Texas: How to Handle the House, the Equity, and the Next Chapter

The median home in Austin is worth about $456,000 right now. In a Texas divorce, both spouses have a legal claim to that equity under community property law, and figuring out what to do with the house is usually the single biggest financial decision in the entire process. Not the lawyers. Not the custody arrangement. The house.

Sounds overwhelming right. But here’s what I’ve learned after 19 years of working with families going through this exact situation: most of the costly mistakes happen because people don’t understand their options early enough. They make emotional decisions about the house when they should be making financial ones. So lets walk through this clearly, because the more you know now, the less you’ll regret later.

Texas Is a Community Property State (But Not the Way Most People Think)

Texas is one of only nine community property states in the country. According to the Texas State Law Library, any property acquired during the marriage is presumed to be community property. That includes the house, even if only one spouse’s name is on the deed.

But here’s the part that surprises people. Texas does NOT require a strict 50/50 split. Under Texas Family Code Chapter 7, judges use a “just and right” standard, which means they have broad discretion to divide property based on factors like fault in the breakup, earning capacity of each spouse, who has primary custody of the kids, and the nature of the assets themselves.

So the house might get split 50/50. Or it might not. It depends on the full picture of your situation. And that’s actually good news, because it means there’s room to negotiate something that works for both sides.

One important distinction: separate property stays separate. If you owned the house before the marriage, inherited it, or bought it with funds that were clearly separate, it’s not community property. But (and this is a big but) if you used community funds to pay the mortgage, make improvements, or even pay property taxes on that separate property during the marriage, the community estate may have a “reimbursement claim” against it. The lines get blurry fast, which is why you need a good family law attorney involved early.

Your Three Options for the House

When divorce involves real estate in Texas, you basically have three paths. Lets look at each one honestly.

Option 1: Sell the House and Split the Proceeds

This is the cleanest option and the one I recommend most often. You sell the house, pay off the mortgage, cover closing costs, and divide what’s left according to the decree.

The math is straightforward. Say your home is worth $450,000 and you owe $280,000. After roughly 8% in selling costs (agent commissions, title, etc.), you’re looking at about $134,000 in net proceeds to split. That’s $67,000 each on an even split.

Why this works so well: it gives both parties a clean break. No ongoing financial entanglement. No one is stuck making mortgage payments on a house they don’t live in. And in Austin’s current market, where buyers have more negotiating power, pricing the home correctly from day one matters even more. Getting an accurate valuation before you list is critical (more on that below).

The downside? If one spouse is emotionally attached to the house (especially when kids are involved), this can feel like losing something on top of an already painful situation. I get that. But I’ve seen too many people fight to keep a house they can’t actually afford on a single income, and that’s worse.

Option 2: One Spouse Buys Out the Other

This is the most popular option when one spouse wants to stay, usually the parent with primary custody who doesn’t want to uproot the kids. The staying spouse refinances the mortgage in their name only and pays the departing spouse their share of the equity.

And here’s where Texas has a tool that most states don’t: the owelty lien.

Normally in Texas, you can only cash out up to 80% of your home’s value when refinancing. That’s a state constitutional limit. But an owelty lien (filed as part of the divorce decree) lets you refinance up to 95% of the home’s value, and it’s classified as a rate-and-term refinance instead of a cash-out. That means better interest rates and no cash-out pricing penalties.

Quick example. Home worth $500,000, mortgage balance of $300,000, equity of $200,000. The departing spouse is owed $100,000 (their half). The staying spouse refinances at $400,000: $300,000 to pay off the existing mortgage plus $100,000 to pay the owelty lien. Without the owelty lien, the max they could borrow would be $400,000 (80% of value), which barely covers it. With it, they can borrow up to $475,000 if needed.

The catch: the staying spouse still has to qualify for the new mortgage on their own. Single income, single credit profile. I’ve seen buyouts fall apart because the spouse who wants to keep the house can’t qualify for the new loan. If there’s any doubt, talk to a lender before you agree to anything in mediation. Not after.

Option 3: Co-Own the House After Divorce

This is rare. And for good reason.

Sometimes couples agree to keep the house jointly for a set period (usually until the youngest kid finishes high school) and then sell. On paper it sounds reasonable. In practice, it creates years of shared financial obligation with someone you just divorced. Who pays for the new roof? What happens if one person stops paying their share? What if one person wants to sell early?

I won’t say never do this, but I will say that every attorney I’ve worked with recommends against it unless there’s a very specific, time-limited agreement with clear terms. Robert Greene (who wrote a whole book about human nature) would probably point out that people going through divorce are not exactly in the best headspace to predict how cooperative they’ll be with their ex two years from now.

How to Get an Accurate Home Value (This Is Where People Mess Up)

The value of your home determines everything in a divorce property settlement. If the number is wrong, somebody is getting shortchanged. And I see this go sideways in two directions.

Mistake 1: Using a Zestimate or online estimate. These automated tools can be off by 5-10% or more, especially in Austin’s varied micro-markets. A $456,000 home with a 7% error means someone is losing or gaining $32,000 on paper. That’s real money. We’ve written about how inaccurate AI home valuations can be.

Mistake 2: Skipping the CMA and going straight to a formal appraisal. An appraisal costs $400-600 and gives you a single number from a single appraiser’s opinion. A comparative market analysis (CMA) from an experienced local agent shows you what comparable homes are actually selling for right now, with context about market conditions, neighborhood trends, and the specific features of your property.

Here’s what I typically recommend: start with a professional CMA from our team. If both parties agree on that value, great. If there’s a dispute, then bring in a formal appraiser (or even two appraisers, one chosen by each side, and average the results). Either way, the CMA gives you a solid starting point and costs you nothing.

And please, do not make improvements to the house before the property settlement is finalized. I’ve had clients spend $15,000 updating a kitchen “to get more value” before the divorce was settled, and then the other spouse claimed half the increased value. You just paid $15,000 to give your ex $7,500. That’s one of the most common seller mistakes and it’s even more painful in a divorce context.

Timing the Sale During Divorce Proceedings

When you sell the house during a divorce matters more than most people realize.

Before the divorce is final: You can sell the house by mutual agreement or by court order (temporary orders). This is often the cleanest approach because both spouses are still legally married, which means you can file jointly and potentially use the full $500,000 capital gains exclusion if you’ve both lived in the home for two of the last five years.

After the divorce is final: If one spouse is awarded the house and later sells it, they can only exclude $250,000 in capital gains as a single filer. For a home bought at $300,000 that sells at $550,000 or more, that $250,000 gap starts to matter.

According to IRS Publication 523, transfers of property between spouses (or ex-spouses as part of a divorce) are not taxable events. So the transfer itself doesn’t trigger capital gains. But the eventual sale does. And the person who ends up selling inherits the original cost basis.

One more IRS rule that helps: if your ex-spouse is granted use of the home under a divorce decree, their time living there counts toward YOUR two-year use requirement. So if you move out but your ex stays for another year before selling, that year still counts for your eligibility. Thats actually a pretty generous provision that a lot of people don’t know about.

Temporary Orders and Who Gets to Stay

During the divorce proceedings, a judge can issue temporary orders that determine who lives in the house, who pays the mortgage, and what can (or can’t) be done with the property. This is usually one of the first things that happens.

A few things to know about temporary orders:

The spouse who stays in the house is not automatically the one who “gets” it in the final decree. Occupancy during proceedings and ownership after divorce are two separate questions.

Both spouses are still legally responsible for the mortgage regardless of who is living there. If your name is on the loan, the bank doesn’t care about your temporary order. A missed payment hurts both credit scores.

Temporary orders usually prohibit selling, refinancing, or making major changes to the property without both parties’ consent or court approval. So no, you can’t just list the house on your own.

Credit and Future Buying Power

This is the part nobody talks about until it’s too late. Divorce can wreck your credit if you’re not careful, and credit directly affects your ability to buy your next home.

The biggest risk: joint debt that doesn’t get handled cleanly. If the divorce decree says your ex is responsible for the mortgage but they miss payments, it still shows up on YOUR credit report. The decree is between you and your ex. The mortgage is between you and the bank. The bank wins.

Benjamin Graham (who literally wrote the book on investing) had this concept of “margin of safety.” It applies here. Build in a buffer. If one spouse is keeping the house and refinancing, set a deadline in the decree. 90 days, 120 days max. If the refinance doesn’t happen by then, the house goes on the market. No extensions. I’ve seen too many situations where “I’ll refinance soon” turns into 18 months of missed payments and damaged credit for both parties.

For the spouse who’s buying next: lenders will look at your individual income, your individual credit score, and your individual debt-to-income ratio. If you’ve been a dual-income household, qualifying alone can be a shock. Start talking to a lender early (even before the divorce is final) so you know exactly where you stand. We break down the income requirements for Austin homebuyers here.

The Homestead Exemption Situation

Texas has one of the most valuable homestead exemptions in the country. In 2026, the state homestead exemption is $100,000, which significantly reduces your property tax bill. But here’s the thing: you can only claim a homestead exemption on your primary residence. One house, one exemption.

If one spouse moves out during the divorce, they need to file for a new homestead exemption on their new primary residence as soon as possible. And the spouse staying in the marital home should make sure the existing exemption stays in place (it usually does automatically unless the ownership changes trigger a reappraisal).

Don’t overlook this. On a $450,000 home in Travis County, losing your homestead exemption could cost you $2,500 or more per year in additional property taxes. That adds up fast.

Working With Both Parties (How I Handle This)

I want to be upfront about something. When a divorcing couple comes to me about selling their home, I represent the property transaction, not the divorce. I’m not a therapist (though some days it feels close). And I’m not going to take sides.

What I do is make sure both parties get accurate information about the home’s value, the market conditions, the costs of selling, and the timeline. Both parties get copies of every offer. Both parties sign off on pricing decisions. Everything is transparent.

In my experience, the transactions that go smoothly are the ones where the attorneys handle the legal stuff, the agent handles the real estate, and nobody tries to use the house as leverage in the divorce negotiation. The house is an asset. Treat it like one.

And honestly, I’ve found that people going through divorce are some of the most motivated sellers I work with. They want it done. They want it done right. And they want to move on. I respect that more than I can tell you.

Five Mistakes to Avoid When Divorcing and Selling

After working dozens of these transactions over the years, here are the patterns I see over and over:

1. Making improvements before the settlement. Already covered this above, but it’s worth repeating. Don’t spend money on the house until you know who benefits from that spending. Every dollar you put in gets split.

2. Listing too high because one spouse wants to “get their money’s worth.” Emotional pricing kills deals in any market, but especially during divorce when time is money and both sides want to close this chapter. Price it right from day one.

3. Forgetting about the mortgage payoff. Your payoff amount might be different from your current balance, especially if you have a HELOC, prepayment penalties, or you’re behind on payments. Get the exact payoff figure from your lender before listing.

4. Not accounting for all the selling costs. Agent commissions, title insurance, survey, repairs from the inspection, prorated property taxes. On a $450,000 home these can total $35,000-40,000. Here’s the full breakdown of closing costs in Texas. If you’re splitting proceeds, both sides need to understand the net number, not the gross.

5. Refusing to cooperate on showings. I get it. Having strangers walk through your home during the worst period of your life is not fun. But restricting showing access will cost you money. Fewer showings means fewer offers means a lower price and a longer timeline.

Going Through a Transition? Lets Talk.

I handle these situations with discretion and care because that’s what the moment requires. No pressure. No judgment. Just honest information about your home’s value, your options, and the timeline so you can make a clear-headed decision about your next chapter.

If you’re going through a divorce and need to figure out what to do with the house, reach out to me directly. We can start with a confidential home valuation and go from there. Be safe, be good, and be nice to people.