What Is a Community Property State?
A contested divorce must rank as one of the modern world's most grueling experiences, but nine states have tried to take the pressure off by passing community property laws. In these nine community property states, couples are required to split equally all assets acquired during a marriage.
The states are:
- New Mexico
A tenth state, Alaska, has an "opt-in" community property law that allows such a division of property if both parties agree. Registered domestic partners who live in California, Nevada, or Washington are also subject to community property laws.
Divorce laws vary by state, with some leaning more toward the community property concept. But these nine states are the only true community property states as of late 2020.
- Community property law requires that a divorcing couple split their assets 50/50, but only assets acquired while they were domiciled in the state.
- Property owned by either spouse prior to the marriage or after the legal separation may not be considered or divided as community property.
- Only nine states are classified as community property states, but state laws vary; some lean more toward the community property standard, and others abide by a common law standard.
Understanding Community Property States
A divorcing couple in one of these nine states is required to divide community property equally, but what does that encompass?
First, it covers anything earned or acquired by one or both parties during the marriage while they lived in the community property state. That includes all income, real or personal property paid for with community money, and retirement and savings accounts. Debts are community property, too, and they are subtracted from the total to be divided.
The property to be divided does not include assets owned by either spouse prior to the marriage or after a legal separation. Gifts or inheritances received by one spouse during the marriage are also excluded.
Responsibility for any debts that date from before the marriage is not shared. And if you purchased property with a combination of community and individual funds, only the part bought with community funds is considered shared.
Broadly speaking, a divorce court in a community property state will split all other assets 50/50 unless both parties agree on another arrangement. In many cases, this requires that any joint property be sold so that the former partners can split the proceeds.
In the case of the death of a spouse, community property states assume the surviving spouse owns any joint property.
What If There's a Prenup?
Anything can happen in court, but the existence of a prenuptial agreement signed prior to the marriage will almost certainly determine the outcome of a divorce, even in a community property state.
So long as the agreement is valid and doesn’t violate state or federal law, the judge will likely accept it as proof that the couple came to an agreement other than a 50/50 split of their assets.
A prenuptial agreement almost always overrides the community property law.
It’s All About the Domicile
If you have homes in more than one state and one of those states is a community property state, how do you know if you are subject to community property law? According to the Internal Revenue Service, it's determined by your domicile, your permanent legal residence.
Factors that determine your domicile include your citizenship, where you pay state income tax, where you vote, where you live most often, and where your business and social ties are, to name a few factors.
Community Property vs. Common Law States
In contrast to community property, common law property is considered to be the property of the spouse who acquires it during a marriage unless it is put in the names of both spouses.
In a common law state, for example, if one spouse purchases a car or a boat and has their name exclusively on the title, the car or boat belongs to that individual. By contrast, if the couple lived in a community property state, the vehicle would automatically become the property of both spouses unless the individual who bought it used their own separate funds for the purchase.
In a divorce, how is property divided in a common law property state? Equitable distribution is the guiding principle. The idea is that property ownership is inherently unequal due to factors such as spouses' levels of education, employability, earnings level and potential, financial needs, age, and health.
Taking these factors into consideration should make the distribution fair, but not necessarily equal. Judges in some of these states, for example, may require that one spouse use their separate property to make a settlement fair to both spouses.
Divorcing parties often will work out how they want to divide their assets and debts on their own or with the help of a neutral party, such as a mediator. If they are unable to agree, the courts decide on the division of property based upon the laws of the state where the couple lives.
Property in Multiple States
Most of the time, property purchased in a community property state using funds that were earned in a state that is not a community property state is excluded from the assets to be split 50/50.
The opposite is also generally true. Property purchased using money earned in a community property state is community property regardless of where it is purchased or located.
Special Considerations in Community Property States
If a married couple files taxes separately, figuring out what is community property and what isn't can get complicated. The ownership of investment income, Social Security benefits, and even mortgage interest can be complicated by state laws.
Tax professionals advise figuring out the tax both jointly and separately. Many people discover the difference is so slight it's not worth the hassle of filing separately.