Community Property States

Have you thought about what will happen to your house and other property if you end up going through a divorce? While it may be an uncomfortable topic to consider, it's a reality that some people face during their lifetime. There are many factors that can affect the division of assets in the event of a dissolution of marriage, but one major factor is dependent on which state you reside in. In the United States, nine states are considered Community Property states, but the majority are considered Common Law states. It's crucial to grasp the difference between these two systems because it can seriously impact how your assets are divided in a marital dissolution. Keep reading as we break down Community Property states and how they can shape the division of your assets if you and your partner decide to part ways.

What is a Common Law State?

Most states use the "common law" system of property ownership. Common law states consider property ownership to be based on individual ownership, regardless of whether it was obtained during the marriage or not. In these states, typically the person listed as the owner of the asset will retain sole ownership in the event of a dissolution of marriage. However, there are some common law states such as Alaska, South Dakota, and Tennessee that will allow a couple to enter into an agreement stating their desire to participate in a Community Property asset distinction.

What is a Community Property State?

Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin are all considered Community Property states. In a Community Property state, property is recognized as either Separate Property or Community Property. During a dissolution of marriage, this distinction of Community Property and Separate Property is crucial to make the division of property fair and equitable. In a Community Property state, any property acquired by a married couple during their marriage is considered Community Property, which means that it is jointly owned by both spouses. And any property earned before the marriage or acquired by solely one spouse, would typically belong to the one spouse in the event of a divorce. You might be wondering how exactly Community and Separate Property is defined, read on for a more thorough explanation.

What is Community Property in a Community Property State?

If you reside in or are considering moving to a Community Property state, you may be curious about what Community Property is and how this distinction may impact your assets. Community Property refers to property that either spouse obtains during their marriage. This includes any income earned by either spouse during their marriage, as well as any real estate property purchased with that Community Property income. For instance, salaries, bonuses, retirement plans (as long as the contributions were made during the marriage), and stock options earned during the marriage are all usually considered Community Property. In the event of a divorce, Community Property is typically divided equally between both spouses, although this may vary based on a variety of factors.

What is Separate Property in a Community Property State?

Separate Property refers to property that is owned by one spouse either prior to the marriage or under certain circumstances during the marriage. Typically, Separate Property is not subject to division in a divorce. Additionally, any income earned from Separate Property, such as rental income, as well as any increase in the value of the property, remains the exclusive property of the spouse who owns it.

A spouse may acquire Separate Property through inheritance or as a gift during the marriage, as long as the property is gifted specifically to one spouse. For instance, if a family member would like to leave a home to one spouse in their will, they will need to ensure documents state that the inherited home is specifically given to that one spouse, otherwise it could be considered Community Property.

Consider the scenario where one single person purchases a residential home with their sole income prior to their marriage. In such a case, the property will typically remain Separate Property if that person gets married in the future. However, certain actions may potentially convert the property into Community Property. We'll explore this further in the following sections of this article.

How does a Community Property system work?

The community property system is based on the concept of equal partnership between spouses, where each spouse has an equal ownership interest in all property acquired during the marriage. This means that any income earned, or assets purchased during the marriage with Community Property belong to both spouses equally, regardless of which spouse earned the income or made the purchase. It also means that debts incurred during the marriage are considered joint debts, and both spouses are responsible for them.

For example, if a couple owns a house together, the value of the house would be considered Community Property and would usually be divided equally in the divorce settlement. Similarly, if one spouse has accumulated a large amount of debt during the marriage, the other spouse may be held responsible for half of that debt.

 
How can Separate Property become Community Property?

There are situations where Separate Property can become Community Property. One way this can happen is through commingling, which occurs when Separate Property is mixed with Community Property. For example, if Community funds are used to pay off a Separate Property mortgage, the Community may have a claim to a portion of the Separate Property. Another way Separate Property can become Community Property is through transmutation, which is when the spouses agree to convert Separate Property into Community Property. This can be done through a written agreement or by the conduct of the spouses.

 By understanding the difference between a community property state and a common law state, you can make informed choices about where to invest in real estate and how it may affect you in the future.

Disclaimer: We are not attorneys. The information provided in this article is for general informational purposes only and should not be construed as legal advice or relied upon as a substitute for professional consultation. It is always advisable to seek guidance from a qualified legal professional regarding your specific situation and applicable laws.