What Is Community Property?

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DEFINITION

Community property is a type of joint ownership of assets between a married couple. With some variation by state, it means all assets purchased or acquired by a couple during their marriage are owned equally by them.

Definition and Examples of Community Property

Community property is joint ownership of all assets purchased during a marriage, no matter which spouse purchased them. Under this system, all community property must be split evenly if a couple divorces.

Community property is the law in nine states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Married couples can elect to have some or all of their property treated as community property in Alaska by stating so in a written contract, but this type of ownership is not mandatory as it is in the other states.

In addition, there are two U.S. Territories that are community property jurisdictions, Guam and Puerto Rico. In these states and territories, assets that enter the lives of a couple after they are married are considered community property. These assets include income, furniture, vehicles, or anything purchased during the marriage.

How Community Property Works

In states where community property is the law, a couple's assets are jointly owned, regardless of how any asset is titled. However, gifts and inheritances are separate property, not owned by both spouses. If one spouse receives an inheritance or gift, it is theirs alone—no matter what their marriage status is.

In a community property state, if you purchase a house during the marriage and put only one partner's name on the deed, the other partner is still the legal co-owner.

Assets

Assets that each spouse owned before the marriage date are not included in community property. For example, if John owned a home before he married Mary, she isn't considered an equal owner of that property, because its acquisition predated the marriage.

However, property can become transmuted into community property. Property transmutation occurs if community money earned during a marriage is used to maintain an asset, such as making repairs or paying insurance premiums.

Income

Income counts as well. For example, suppose John and Mary are getting a divorce. They are both employed and earn income. Therefore, each would own half of the total income and wages after the date they were married.

Debts

Debts also fall under the umbrella of community property. Depending on state laws, debts are equally owed by both spouses, regardless of which one incurred the debts. For example, if John were to run up a $10,000 credit card bill in his name and fail to make the payments during their marriage, the lender could pursue Mary for the money during the marriage and might be able to lay a claim to at least half of the money after a divorce.

Taxes

Federal income taxes are affected by common property laws. If spouses file separate income taxes, each is taxed on 50% of the total income, no matter which spouse earned it. For example, if Mary brought in $75,000, and John only brought in $25,000, and they filed separately, they would each pay federal taxes on $50,000 of income for the year. Each would also be responsible for federal taxes on separate property.

Make sure you understand how state taxes work if you live in a community property state. If you're unsure, contact your state's tax authority.

Community Property and Divorce

When a couple divorces in a community property state, each spouse is generally entitled to half of their marital or community property. Likewise, each spouse would be responsible for an equal share of all marital debts.

Divorce laws can vary somewhat among the community property states, so consult with an attorney who practices in your state if you want to know the state's rules. For example, a prenuptial agreement can override community property law in California.

If both spouses consent to a non-community-property arrangement in writing and their agreement meets all the rules for a qualified prenuptial, their property and debts would be divided according to the agreement, not community property law.

All other states, sometimes called "equitable distribution" states, divide marital property and debts in a way that seems equitable and fair to a judge or by an existing agreement between the spouses.

Community Property and End of Life

As with divorce, asset distribution following the death of a spouse in a community property state depends on state law. If the couple didn't make an estate plan with a will, the intestacy laws of the state where they lived would govern who gets what. These laws tend to vary a great deal among community property states.

For example, a surviving spouse would inherit all the community property in Texas if the couple had children together. But if the spouse who died had children from a previous marriage, those children would receive their parent's 50% share of the community property. The surviving spouse would receive only a 50% share.

Key Takeaways

  • Community property is a form of joint property ownership law in nine states and two territories; it is optional in one state.
  • Excluded are assets acquired before a marriage. Gifts and inheritances received during the marriage are also separate.
  • Income and debt are jointly owned in community property states unless the income or debt is from a separated asset.
  • Prenuptial agreements can override community property law if explicitly specified.

Article Sources

  1. Internal Revenue Service. "Community Property Law." Internal Revenue Manual, Part 25.18.1.2.2

  2. Internal Revenue Service. "Community Property Law." Internal Revenue Manual, Part 25.18.1.3.19.

  3. Internal Revenue Service. "Community Property Law." Internal Revenue Manual, Part 25.18.1.3.22.

  4. Jin Kim. "Splitting Community Property Assets and Debt."

  5. Internal Revenue Service. "Community Property Law." Internal Revenue Manual, 25.18.1.2.4.

  6. Internal Revenue Service. "State Government Websites." Click on your state, look for the Taxation section, click on the link to the state tax agency's webpage.

  7. Internal Revenue Service. "Community Property Law." Internal Revenue Manual, Exhibit 25.18.1-1

  8. Legal Information Institute. "Equitable Distribution."

  9. Texas Constitution and Statutes. "Estates Code: Title 2: Estates of Descendants." Sec. 201.003 (b)(2).