Although only nine states follow community property laws, those states include about 25% of the United States population. If you live in an equitable division state but move to a community property state later on and get divorced, you could be impacted as well.
That means there might be a better chance that you suspect when it comes to the possibility of community property laws affecting you.
Here’s what you should know about community property laws and what that could mean to you in a divorce.
What does it mean to be a community property state?
When it comes to dividing property in a divorce, states are either governed by community property laws or equitable division laws.
It’s important to understand the differences between the two. In both cases, you must first determine what is a shared asset and what is separate property.
Community Property States
Community property is everything that a husband and wife own together. This can be a home, cars, jewelry, bank accounts, retirement funds or anything of value. These assets are acquired during a marriage.
Under community property laws, both spouses own everything equally, regardless of who bought it or whose income was used to purchase it.
Exact community property laws will vary slightly from state to state, so it is best to check and see what the laws are for your jurisdiction if you have specific questions.
It should be noted that any debts acquired during the marriage are also considered community property as well.
Another thing to note is that in the event of a spouse’s death, a surviving spouse is considered to own any property owned jointly or by the deceased spouse.
Equitable Distribution States
Most states use equitable division to settle property issues in a divorce.
Equitable means “fair” but it does not necessarily mean an equal 50/50 split. The courts will consider many factors before reaching a decision about how to best divide assets.
This can include more than a dozen variables ranging from each spouse’s earning power, the age and health of each spouse, tax issues and others. Many of these factors are subjective, so it’s difficult to always predict what each spouse will be awarded in a divorce.
Equitable distribution laws only apply in court. Before a judge determines the allocation of marital assets, spouses work distribution out either on their own or through attorney negotiations. While equitable distribution laws should be kept in mind during negotiation, spouses are free to divide their property in the manner in which they see fit before taking a case to court.
In some cases, spouses may be able to divide a portion of their marital estate and bring the remainder to the court to decide how to distribute the rest.
List of Community Property States
There are currently nine community property states:
- New Mexico
Alaska has an “opt-in” community property law. This allows a community property division if both parties agree.
What is the difference between a common-law state and a community property state?
There are 41 states that rely on the concept of common law property to determine who owns property that is acquired during a marriage.
Unlike community property states where it is assumed that an asset belongs to both spouses if acquired during a marriage (with some exceptions), in a common-law property state, any asset the spouse acquires that is put in their name only, is considered their property only.
For example, if one spouse buys a car and puts the title in their name but not their spouse’s, then the car belongs to that individual only. But if the couple lived in a community property state, the car would automatically become the property of both when purchased. The exception would be if the spouse bought the car using separate funds only and could prove that after the fact.
In a common-law state, equitable distribution is the method used to divide property in a divorce. This means that the property will be divided fairly, but not necessarily equally (no 50/50 split).
There are several factors that could go into splitting the property fairly such as education, earnings capabilities, age, health, and other factors for each spouse.
It’s also important to note that in some of these states, judges may require spouses to use their separate property as part of the overall settlement.
Is income from a separate property asset considered separate or community property?
Community income are funds derived from community property assets such as the sale of a family home, income from a rental property or business profits.
It can also include salaries, wages, or other income that you or your spouse earn during your marriage while you are living in a community property state.
Separate income includes funds that are generated from separate property that is owned only by one spouse.
Separate property is defined as property that you or your spouse owned separately before your marriage or money that was earned while living in a non-community property state. It can also include property that you or your spouse inherited or received as a gift during your marriage.
Property that you or your spouse bought or exchanged with separate funds or was converted from community property to separate property under applicable state laws also qualifies as separate property.
In some states, the income you earn after you are separated and before a divorce decree is issued continues to be community income. In other states, it is separate income.
For example, in Idaho, Louisiana, Texas, and Wisconsin, income from separate property is community income.
How can you keep separate property separate?
Don’t get married.
This is a pretty simple and straightforward solution. In most, but not all instances, if a couple is not married, the court will view the couple’s assets as separately owned assets instead of community property.
Execute a pre-nuptial or post-nuptial agreement.
You and your future or current spouse
can draft a legal agreement that protects certain assets as separate property or converts community property to separate property if either spouse dies or the marriage is dissolved.
By doing this, the assets then become subject to the claims of the creditors of the individual who holds the assets.
All community property states give the option of opting out of the system. That is, given the provision of a formal written premarital agreement according to the Uniform Premarital Agreement Act (UPAA). In some states, you may be able to opt out of the common law system without a formal agreement. But to be on the safe side, a formal legal document is always advisable.
Invoke the Innocent Spouse Act.
U.S. tax law protects a spouse from a tax liability that they did not know about. Specifically, it deals with income or assets that a partner held that they did not disclose to the other spouse, especially in instances of divorce or death.
You must meet certain criteria for this law to apply and to be eligible for relief:
- Whether or not the person received a significant direct or indirect benefit from the understatement of tax liability
- Whether or not the person’s spouse or former spouse deserted them
- If the couple had divorced or separated or not
- Whether or not the person received a direct or indirect benefit on the return resulting from the understatement of tax liability.
The law also allows the courts to grant an innocent spouse a refund if there was an overpayment made by the innocent the community tax liability.
Even in community property states, some assets are considered separate. This can include things such as an inheritance or gift, settlement from a personal injury case or property owned before marriage.
If the assets are joined in any way, such as making a deposit to a joint bank account, or if both spouses live in a house that was inherited or gifted to one spouse, then the assets are considered to be commingled and may be classified as community property.
These rules apply no matter whose name is on the title document to a particular piece of property. For example, a married woman in a community property state may own a car in only her name — but legally, her husband may own a half-interest.
The bottom line for keeping separate property separate:
- Don’t get married
- Execute a pre-nuptial or post-nuptial agreement
- Invoke the Innocent Spouse Act
- Avoid commingling
When does separate property become community property?
Separate property is defined by individual state laws. But in general, any property owned prior to marriage, money acquired by one spouse as a gift or inheritance or proceeds from a personal injury settlement are considered separate property. If a prenuptial agreement was in place or property was acquired after the date of separation, it is also considered separate property.
In these instances, separate property can become community property when it is commingled.
This takes place when separate property is mixed with community property. For example, if one spouse inherits a sum of money and puts it into a joint checking or savings account, the funds have then become commingled and are now owned by both spouses because you can’t distinguish what is separate and what is not.
To refute a claim of commingled property, you must have a clear paper trail that shows how an asset became separate property and how it is classified now and why. This asset tracing can be difficult to undertake at times, so detailed records are essential, especially as the years go by. However, spouses who hold onto the original documents may be able to accurately trace the source of funds.
When is community property not divided equally or equitably?
In most cases, property acquired during a marriage belongs to both spouses. The characterization of the property (marital vs. separate) is more clearly delineated in community property states than those governed by equitable distribution laws.
The general rule is that community property is divided 50/50. (Courts have much more leeway to determine how property is divided in equitable distribution states.)
The majority of community property states won’t deviate from the 50/50 division, regardless of the circumstances. But, there may be certain exceptions to this rule.
Here’s a laundry list of factors a court might consider.
Custody of the children. Courts may make allowances for the parent who is primarily responsible for the bulk of the children’s care and upbringing.
The amount of each spouse’s separate assets. The court can look at this and take it into consideration when determining each party’s overall financial condition.
Each spouse’s health. Relative physical condition and health issues may be a part of a final decision.
Age. This can also be considered as it relates to health and future earning power.
The length of the marriage.
Education and employability. Courts may also consider each spouse’s education, earning capacity, abilities, and future prospects in the job market. This is especially prominent in instances where one spouse has sacrificed a career to stay home and take care of domestic responsibilities.
Disparity of earning capacity (i.e., one spouse is an attorney and the other has been out of the workforce for many years).
Liquidity. Some assets are more liquid than others and this could be a factor in some cases.
Anticipated inheritances. One of the spouses may be in line to receive a large inheritance.
Income-producing probability. An asset that can generate future income may be treated differently than other assets (i.e., rental properties, a business, etc.).
Relationship to an asset. One spouse may be better suited to manage or handle certain assets such as a business. Also, a property was acquired solely or primarily through only one spouse’s efforts, or a spouse may be more closely associated with an asset than the other.
Capital gains or losses. In most cases, the transfer of a property as part of a divorce does not result in a tax liability. But when an asset is subject to capital gains or losses if the asset is sold or exchanged at a later date, the court may consider this as a factor.
Expenses incurred while a divorce is pending. Temporary spousal support and expenses paid by one spouse to maintain community property (i.e., the family house, car payments) may be offset as part of a settlement agreement.
Attorney fees and case costs. A court may consider legal fees and related expenses incurred by each spouse related to litigating a divorce action.
Tax consequences. There may be tax issues that need to be resolved when community property is divided. This can include income-generating property, retirement accounts and other distributions. For example, if funds are withdrawn from an IRA, 401(K), or pension plan before the employee reaches 59½, passes away, or is disabled, there is a 10% penalty on the early withdrawal.
Torts. A court can consider one spouse’s wrongful acts or infringements of rights against the other spouse resulting in a loss or harm.
Cruelty. If a spouse’s cruel treatment made living together no longer an option.
Abandonment. If one spouse voluntarily left or stayed away for an extended period of time, usually one year or more.
Adultery. As long as proof can be shown.
Felony conviction. A conviction that leads to an extended period of incarceration.
Fraud. If one spouse dishonestly attempted to hide assets from the other, either through active fraud or constructive fraud.
If you want to challenge a 50/50 division of community property, you need to understand the laws in your state and speak with an experienced attorney to determine if this is even worth pursuing.
Moving from a Common Law State to a Community Property State
If one spouse buys property in a non-community property law state, then that property is still considered separate even after moving to a community property state. It does not automatically convert to community property just because you changed jurisdictions.
If the separate property is sold or exchanged in a community property state, it will still be considered as separate property.
When a couple moves from a common law state to a community property state, rules will differ depending on where you move. For example, if you move from a common law state to California, Washington, Idaho or Wisconsin, the property you bring into the state becomes community property.
If you move to another community property state (Alaska, Arizona, New Mexico, Nevada, or Texas), your property ownership won’t automatically change
Some community property states have “quasi-community property” rules. Quasi-community property is acquired by a couple living in a common-law state that would have been shared property if they were living in a community property state.
Quasi-community property is treated as community property when the couple moves into a community property state. Check your local laws to see if quasi-community principles apply.
Moving from a Community Property State to a Common Law State
Because states differ in how property is treated, moving from one state to another could have some impact on your property. It depends on the specific laws of the state where your new home is located.
But in general, property acquired as community property in a community property state does convert into non-community property when moving to a state not governed by community property laws. Community property stays as such even after the fact.
Also, if you sell or exchange community property in common law states, that purchase or acquisition will still be considered community property.