Community Property States: Do You Live In One?
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If you’ve ever gone through a contentious divorce, then you may know that one of the most challenging aspects is figuring out how the marital assets will be divided.
How the asset division plays out largely depends on what state you live in. Nine states in the U.S. have attempted to make this process easier by becoming community property states.
But what is a community property state, and how do you know if you currently live in one? That’s exactly what we’ll discuss in this article.
What Is A Community Property State?
In a community property state, all of the marital assets are jointly owned, so they must be jointly split in the event of a divorce. Some examples of this include:
- Real estate
- Personal property
- Retirement accounts
- Debts acquired during the marriage
Community Property: A Brief History
Community property laws began in the western U.S. in the 1830s and 1840s as states like California and Texas (that had been under Spanish control) became part of the union. The goal of these laws was to provide married women and their children with legal protection and rights of ownership in the event that their husband died, divorced them or simply disappeared.
These laws were eventually consolidated with the Uniform Marital Property Act of 1983. This act defined the ownership of property in a marriage and outlined how these assets would be separated in the event of a divorce.
One of the most notable things that resulted from the Uniform Marital Property Act was a new class of property that belonged to the marriage, not any particular individual. So if there was ever any doubt about who a piece of property belonged to, it now was considered general marital property.
There are a few instances when a property is considered individual property. Primarily when the property was acquired before the marriage or was inherited by one spouse before or during the marriage. But if you live in a community property state and buy a home while married, even if you purchase it without your spouse, it’s considered community property.
Despite the 1983 act, common property is not a popular concept in the U.S. As of 2021, community property law is only required in nine states.
Common Property Law Vs. Community Property Law
It may also be helpful to understand the difference between common property law and community property law. Common property recognizes each spouse as a different entity. It lets both married partners own their property separately, meaning each of their respective assets and investments belong to them unless their partner’s name is on it as well.
A surviving spouse is not entitled to the property unless a written contract states otherwise with common property law. By contrast, community property law doesn’t identify the couple as separate entities, meaning they can’t own their property individually.
If your state isn’t a community property state, or an opt-in community property state, it probably follows an equitable distribution. In this case, a judge must divide the assets and earnings that a couple accumulated during marriage fairly, but not necessarily equally. That means if you sell your home as part of a divorce, the judge may require you to split the proceeds 60/40 or 70/30 instead of 50/50.
Which States Are Community Property States?
Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. In these states, any assets acquired by spouses throughout their marriage are labeled as community property regardless of who bought them.
California, Nevada and Washington also include domestic partnerships under community property law.
Opt-in Community Property States
Though not a community property state, Alaska does have an opt-in community property law. That means spouses can divide their property by community property agreement standards, but it’s not mandatory.
Similarly, Tennessee gives married couples the option to transfer assets to a community property trust, but both spouses must agree to a specific set of terms and requirements. Otherwise, in the event of a divorce, assets will be divided using equitable distribution.
Some states with community property laws such as Texas and Washington may also allow judges some discretion to assign assets fairly using an equitable distribution model, even if they aren’t divided evenly. This may be done based on the circumstances of the divorce.
Exceptions To Community Property Law
There are certain exceptions to community property law. Most states in the U.S. implement common law property to determine ownership of assets acquired during a marriage.
However, there are certain situations where a couple may be exempt from a community property law.
According to common law property, if one member of a married couple acquires separate property during the marriage, the property belongs to that person alone. The only exception is when the property is listed under both spouses’ names.
For example, if a married spouse in one of the common law states purchases a vehicle and the vehicle is listed solely under their name, it belongs exclusively to that person. In comparison, if that person lived in a community property state, the vehicle would be considered a marital asset.
Community property laws also may not apply in the following situations:
- Gifted property: The property was given to one spouse but not the other as a gift, or if a spouse gifted the property to the other.
- Inheritance: If a spouse inherited property during the marriage or the property was received through a will or trust fund.
- Property acquired outside the marriage: The property was acquired before the marriage began or the property was acquired while the spouses were legally separated and living apart.
Estate Planning With Community Property For Married Couples And Domestic Partners
Understanding how community property law works and what the states permit is crucial, because it helps determine how married couples or domestic partners can use their rights.
When Do Spouses Become Subject To State Community Property Laws?
According to the Internal Revenue Service (IRS), spouses can take advantage of their state community property laws when married and living in a permanent home together. If either partner owns the property before their union or after they legally separate, the state may not recognize or split their assets as community property.
Do Domestic Partners Have Community Property Rights?
Domestic partners can sometimes create community rights and be recognized as an alternative for marriage, depending on the state. For instance, among the nine community property states, Arizona, Idaho and Louisiana won’t authorize these scenarios, but California and Nevada will.
Can Community Property Laws Be Negated?
Even if you live in a community property state, specific circumstances may negate these laws. Let’s look at some examples of each situation.
A prenuptial agreement is a legal agreement two people enter before getting married. A prenup outlines what will happen to a couple’s financial assets in the event of a divorce. Many people use prenuptial agreements as a way to protect their assets and circumvent what the law says should happen after a divorce.
Prenuptial agreements may override community property laws, assuming the agreement is valid and doesn’t violate state or federal laws.
Property In Multiple States
Community property law is subject to the IRS classification of a domicile or permanent legal residence. Many factors determine if a property is a domicile, including:
- Where state income tax is paid
- Voter registration
- Business ties
- Where the most time is spent
Where a property is a domicile comes down to a matter of intent. What state do you consider your home state? If you meet the residency requirements for a common law state, you may be able to get around community property laws.
Filing Taxes Separately
Couples who file taxes separately may face complications with community property law. If you find yourself in this situation, it’s a good idea to consult with a tax professional. That person can help you determine what falls under community property laws and what doesn’t.
The Bottom Line
If you’re going through a divorce and live in a community state, most of your assets will be considered marital property. This means the division of property will have to be equal between both partners.
These assets include things like real estate, savings, retirement accounts and any debt acquired during the marriage. There are certain exceptions to community property laws, like when a couple has a prenuptial agreement in place. If you inherited property or bought property before getting married, those assets belong to you alone.
All in all, community property law can have a huge impact on your future as a homeowner. To learn more about buying a home as a married couple, start an application today and talk to one of our Home Loan Experts.