Marriage is about sharing: sharing your life, sharing laughter, sharing memories and all sorts of other wonderful things with your partner.
In some states, the law requires that you share certain things with your spouse as well – things like real estate, debts and money. These states are known as community property states, and the laws in these states can have a big impact on how assets are shared during a marriage and how they’re divided in divorce.
If you live in a community property state, it’s vital that you understand how these laws impact your marriage and financial life. Here’s what you need to know.
What Is A Community Property State?
If you’re married and live in a state with community property laws, any assets you’ve earned, purchased or acquired during your marriage equally belong to both you and your spouse.
These laws often come into play during divorce proceedings, but they’re also important to understand when it comes to other big financial moves that can impact your partner, such as purchasing a home or taking on debt.
When couples go through divorce in these states, the assets that are subject to the state’s community property rules will be split 50/50 among the two of them. This could include things like:
- Real estate, including a primary residence purchased by one or both spouses during their marriage
- Personal property, such as furniture
- Savings, investment or retirement accounts
Remember that these rules only apply to property obtained during the marriage and that each state has its own rules for exactly how community property is handled.
Property or earnings acquired prior to a marriage will typically remain as that spouse’s separate property. There are also exceptions for gifts or inheritance given to one spouse – these types of assets aren’t considered community property.
Community property is the law in only a handful of states; all other states are known as common law states, where each spouse owns the earnings and property they acquire unless they purchase property in both of their names.
If you live in a community property state and are married or plan on getting married, it’s important to understand how these laws will impact you, especially if you plan on buying a house without your spouse or if you’re trying to buy a home while legally separated or in the middle of a divorce, as these laws can affect your ownership.
For example, if you move out of your shared home and purchase a house of your own before your divorce has been finalized, your spouse may end up having a legal right to that property. Or, if you want to get a mortgage by yourself during your marriage, your spouse’s debts may still be calculated in your debt-to-income ratio, depending on your loan type.
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Which States Are Community Property States?
Community property states as of 2020 include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. In these states, community property law applies to all assets acquired by spouses during the marriage.
The exact details of these laws, however, vary from state to state.
In addition to these states, Alaska allows married couples to opt into community property status, but it isn’t required by law.
Exceptions To Community Property Law
As we’ve already mentioned, certain types of property are exempt from community property rules, including any assets acquired or debt incurred before the marriage and any gifts or inheritances belonging to one spouse, regardless of when they were acquired.
Other exemptions may depend on your individual state’s rules or may even hinge on what the court deems to be a fair and equal division of your assets.
For example, in some states, money from a personal injury settlement or award is considered separate, rather than community property. In others, it may always be considered community property, or different parts of the settlement may be classified in different ways. Alternatively, the court may take certain factors into account – such as the amount of time that has elapsed since you initially received the damages – when determining whether to divide this money between both spouses.
Since the specifics of the law can vary quite a bit depending on where you live, it’s important to work with an attorney who’s licensed to practice law in your state if you have questions regarding what is and isn’t yours in a divorce proceeding.
Can Community Property Laws Be Negated?
Even if you live in a community property state, you won’t necessarily always be bound by those laws. Let’s take some look at some circumstances in which a state’s community property laws might not apply, and some situations where they’re unavoidable.
If you signed a prenuptial agreement that outlines how your assets will be divided in the event of a divorce, it will typically override any community property laws, provided that the agreement is legally valid.
Divorce Settlement Agreements
In fact, any of these types of legally binding contracts can be used to negate your state’s community property laws. This includes a post-nuptial agreement (which is created after the couple is already married) or a divorce settlement agreement in which the divorcing couple have come to an agreement on how their assets will be divided.
The purpose of property distribution laws are to provide a legal framework for the division of assets among divorcing couples who don’t already have an arrangement that they’ve both agreed on. If you and your spouse can’t come to an agreement on how your property should be divided, a court will do it for you according to the state’s laws.
Again, agreements on distribution of property will need to be enforceable. To ensure that your contract is valid, work with an attorney rather than try to create one on your own.
Property In Multiple States
If you own multiple homes or investment properties in states other than the one you live in, you might be wondering which state’s laws apply when it comes to dividing the assets.
Though it can get complex, what typically happens is that the court will treat out-of-state marital property according to the laws of the state in which you’re filing for divorce.
So, if you live in a community property state, it’s likely that any out-of-state property will be divided equally between you and your spouse, even if that property is located in a common law state.
Filing Taxes Separately
In community property states, both spouses have an equal right to any income earned during the marriage, regardless of who actually earned the income. This is important to remember when filing your taxes.
You won’t be able to avoid your state’s community property laws by filing separately; each spouse will be taxed on 50% of your total community income, and you’ll also be taxed 100% on any separate income that belongs just to you.
When doing your taxes, it’s important that you understand what your state considers community property vs. separate property.
If you’re unsure whether it makes more sense for you to file jointly or separately, it may be a good idea to figure it both ways and see which one saves the most money.
The Bottom Line On Community Property States
Though few people like to think about divorce while things are going well in a marriage, it’s important to understand how your state’s marital property distribution laws could impact you in a divorce. Planning ahead can help you avoid lengthy legal battles or financial hardship.
Plus, even if you never divorce your partner, living in a community property state can still affect the ownership of your home, how you do your taxes and what debts you’re responsible for. If you’re married or plan to be, be sure to read up on what the laws are in your state.
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