Real Estate Partition: Tax Consequences and the Need for Asset Protection Planning

What is a Real Estate Partition Lawsuit in Texas?

During major life transitions, such as the death of a family member, divorce, or breakup of a business, fear and uncertainty can drive joint property owners into rushed decisions that harm everyone involved. Heightened emotions can lead to disputes and ultimately, legal action. A common outcome is a partition lawsuit, where one or more joint owners seek to divide or sell the jointly owned property. These lawsuits often arise during divorces, disputes among siblings or heirs in probate and will administration, or partnership and other business dissolution proceedings. Real estate partition lawsuits are on the rise nationwide, and Texas is no exception. 

In Texas, joint property owners have an absolute right to seek a partition of jointly held property through the courts. Under Texas Property Code, Section 23.001, a joint owner or claimant of real property may compel a partition of their interest or of the property itself among all joint owners. Texas law favors a partition in kind, meaning a physical division of the property itself rather than a sale. 

However, a partition in kind is not always feasible. The key legal question in a partition lawsuit is whether the property can be fairly and practically divided among the owners. Texas courts focus on what will maximize the value of the property and serve the best interests of the parties. For example, not every single square mile of a jointly-held property may be equal in value, use, or enjoyment. If the court finds that a partition in kind would be impractical or unfair, it can order the sale of the property and divide the proceeds among the owners.  

Texas property partition rules can be complex as courts determine fair and equitable outcomes for all parties involved. However, remember that joint owners have an absolute right to request partition of real property—regardless of how the property is used. The same legal standards apply whether the real property is used or designated as residential, commercial, industrial, or other purpose. 

Federal and State & Local Tax Consequences of Property Partition

Partitioning real property can have major federal and state and local tax (SALT) consequences. For example, the partition could trigger capital gains taxes under Internal Revenue Code Sections 1, 301, and 336. Estate tax ramifications may also arise under Internal Revenue Code Sections 641 and 643. 

At the state level, partitioning real property could lead to reassessments by local appraisal districts under the Texas Tax Code. These reassessments may increase property tax liability. The Texas Constitution and Tax Code require that taxes be equal and uniform throughout the state and based on a property’s fair market value.

This is only the tip of the iceberg with regard to the potential federal and state & local tax consequences. As discussed earlier, if a fair and equitable division isn’t possible, Texas judges can order the sale of real property. This process can be costly and time-consuming. 

If you’re facing or anticipating a property partition, consulting with an experienced tax attorney can help you understand the potential financial impact and avoid unintended consequences.

Why Strategic Planning is Essential Before Property Partition

We often enter into relationships searching for and expecting perfect outcomes. But life can bring unexpected twists and turns—a sudden death in the family, a divorce, or collapse of a business. Without a plan in place, the fallout can be emotional and financial.

The key is having a strategy that is well thought out, clearly communicated, and ready to implement before disaster hits. That means sitting down early with an asset protection or estate planning attorney who can ask the right questions:

• What are your goals and long-term objectives?
• What assets do you own?
• Who do you want to pass them onto, and when? 

These conversations with your legal counselor can help you build a strategy that reflects your intent and protects your property. This strategy may include tools such as trust selection, business entity selection, or business succession and exit strategy plans. 

Strategic estate planning is designed to help preserve your wealth by setting clear expectations, minimizing tax burdens, discouraging aggressive litigants, and ultimately reducing the risk of costly legal disputes before they arise.

What to Do When You Haven’t Planned Ahead for Real Estate Partition

While strategic planning is the ideal way to protect the value of your assets, sometimes life events happen without any warning. This failure to plan can leave your assets vulnerable to creditor fights, tax collectors, sibling disputes, probate protests, divorce property disputes, or other corrosive asset events. 

If you haven’t made a plan yet, it’s not too late to protect your property. Working with a trusts, estates, and wills administration attorney familiar with Texas community property laws, the Probate Code, and the Estate and Trusts Code is crucial. If your dispute involves business assets, consulting a business lawyer will also be key. With their help, you can assert your property rights as you navigate legal, financial, and emotional challenges due to sudden life events. Call or book an initial consultation with our attorneys today to take the first step toward a softer landing.

This law blog is written by the attorneys at Coleman Jackson, P.C., located at 6060 North Central Expressway, Suite 620, Dallas, Texas 75206, for educational purposes only. It does not create an attorney-client relationship between this law firm and the reader. You should consult with legal counsel in your geographic area regarding any legal issues affecting you, your family, or your business.

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