What Happens to the Family Home in a Texas Divorce?

When couples in Texas divorce, few assets carry as much emotional and financial weight as the family home. Beyond its market value, a home represents stability, memories, and — for many — the heart of family life. For divorcing spouses in the Houston–Galveston region, deciding what happens to the family residence can be one of the most complex and emotionally charged parts of a settlement.

At The Palmer Law Firm, we often tell clients that the family home isn’t just a structure made of brick and siding — it’s a “box” that contains three smaller boxes inside: use issues, disposition issues, and tax issues. Understanding each of these areas is key to reaching a fair and informed outcome.
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1. Use Issues:
Who Stays in the Home During the Divorce?
Before a divorce is finalized, one of the most immediate questions is who gets to live in the home. Texas courts may award exclusive occupancy to one spouse — usually the parent who has primary possession of the children — as part of temporary orders.

During this time, several practical concerns arise:

• Who will pay the mortgage, taxes, and insurance?
• Who is responsible for repairs and upkeep?
• Will both spouses have access to personal belongings stored in the home?
• What happens if one spouse moves out and the other remains until the house sells?

In the Houston area, where mortgage rates have fluctuated dramatically since 2020 and home values have soared in places like League City and Friendswood, it’s common for spouses to struggle over whether one can realistically afford to stay in the house after separation.
A mediator or attorney can help establish temporary agreements that balance fairness, financial responsibility, and the children’s stability — often with the understanding that these arrangements are just that: temporary.

2. Disposition Issues: Who Ultimately Gets the Home?
Once the divorce moves toward settlement, the couple must decide the long-term fate of the property. In most Texas divorces, one of four outcomes occurs:

1. The house is sold and the net proceeds are divided according to the marital property division.
2. One spouse keeps the home, often offsetting the value with other assets (such as retirement accounts or cash).
3. The other spouse keeps the home under the same type of offset arrangement.
4. Both spouses co-own the home for a defined period — often until the youngest child graduates high school.

Each choice comes with legal and financial implications. For example, if one spouse keeps the home in League City valued at $600,000 with a $300,000 mortgage, the other spouse must be “bought out” for half of the equity (minus any agreed costs of sale). However, this buyout can be complicated if the retaining spouse cannot refinance the mortgage in their own name — a common issue when one spouse has been out of the workforce or has limited credit.

In these cases, the court may order the home to be listed for sale. The Texas Family Code allows flexibility, but the overriding rule is that property division must be “just and right” — which may or may not mean 50/50.

3. Tax Issues: Understanding Capital Gains and Deductions
The third “box” — tax issues — often catches people off guard. Even though Texas does not have a state income tax, federal tax consequences still apply when the marital home is sold or transferred.

The 2025 Federal Capital Gains Law
As of 2025, under IRS Publication 523, homeowners can still exclude up to $250,000 of capital gains on the sale of a primary residence if single, or up to $500,000 if married filing jointly. To qualify, the seller must have:

• Owned the home for at least two of the last five years, and
• Lived in it as their primary residence for at least two of the last five years.

After divorce, only the spouse who remains living in the home may later claim the exclusion individually (up to $250,000). If the couple sells the house together before the divorce is final, they may still qualify for the $500,000 joint exclusion — which can make timing the sale critical.
For instance, suppose a Friendswood couple purchased their home in 2012 for $250,000, invested $50,000 in improvements, and now sell it for $575,000. Their capital gain is $275,000. If they sell while still legally married, they can exclude the entire gain from federal taxes. If they wait until after divorce, each ex-spouse may only exclude up to $250,000, leaving a small portion potentially taxable if the home continues to appreciate.

Deductible Costs During Divorce
In the interim period, the spouse paying the mortgage may still deduct the interest and property tax portions on their federal tax return — even if temporary orders give exclusive use to the other spouse. However, these deductions must align with ownership interest and IRS allocation rules. A qualified tax advisor should review any interim arrangements before filing.

4. Calculating Equity: What’s the House Really Worth?
Before negotiating who keeps or sells the home, spouses must understand the difference between equity and capital gain — two terms that sound similar but serve very different purposes.

Here’s how equity is generally calculated:

Calculation of Equity
Example (Houston Home)
Fair Market Value (FMV)$575,000
Less: Mortgage– $300,000
Less: Equity Line / Liens– $25,000

Gross Equity
$250,000
Less: Estimated Sale Costs (≈7%)– $40,250

Net Equity
​$209,750
That $209,750 is the real amount the spouses could walk away with after a sale — before taxes or division.
When one spouse “buys out” the other, the buyout should reflect true net equity, not just the difference between value and mortgage. In many Houston-area divorces, parties also factor in estimated real estate commissions, refinance fees, and closing costs even if they decide not to sell.

5. Emotional and Strategic Considerations
While spreadsheets and tax rules are essential, the emotional side of the decision shouldn’t be underestimated. For parents, especially, the home often represents continuity for children. Many mothers and fathers in Galveston County choose to keep the family home, even at financial strain, to avoid disrupting school zones or friendships.

Attorneys play a critical role in helping clients distinguish between emotional value and financial feasibility. Sometimes, keeping the home is worth the sacrifice; other times, selling it frees both parties to rebuild more securely.

Either way, understanding the financial, tax, and emotional realities behind the decision ensures informed consent — and a smoother transition to post-divorce life.

Final Thoughts
In Texas, the family residence is often the largest community asset — and the most sentimental. Whether you’re selling, refinancing, or co-owning temporarily, your decisions should be based on clear financial data and current tax law, not just emotion.

At The Palmer Law Firm, we help clients in League City, Friendswood, La Porte, and the greater Houston area navigate the sale or retention of their homes with both fairness and foresight. If you’re facing divorce and uncertain about what will happen to your home, we can guide you through the legal, financial, and emotional aspects of this important issue.

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