As the question of who gets what in a divorce is often hotly contested, nine community property states have made the division of material much more straightforward. Their solution is to split the assets in half, with each spouse receiving an equal share. Those states are:
- New Mexico
What Constitutes 'Community Property'
Community property is anything you earn as a couple. That includes all income while married, real or personal property paid for with community money, debts acquired during marriage and retirement and investment accounts.
Here are the only assets that remain separate: property owned by a spouse prior to getting married or after legal separation, gifts or inheritances during marriage from a third party, and debts incurred prior to marriage.
Broadly speaking, in community property states a divorce court will split all other assets 50/50 unless both parties agree on other arrangements. In most cases, the property is sold and the former partners split the proceeds. Upon the death of a spouse, community property states assume that the surviving spouse owns any joint property.
Does a Prenuptial Agreement Trump Community Property?
Anything can happen in court, but community property laws are used to divide assets when a divorcing couple doesn’t agree on how to split the property. If both sides come to an agreement that isn’t a 50/50 split, the judge will likely accept it. A prenuptial agreement put in place prior to the marriage will be seen as valid as long as it doesn’t violate state or federal law.
It’s More Than Divorce
If a married couple files taxes separately, figuring out what is community property and what is separate can be confusing and depends on the laws of your particular state. Investment income, Social Security benefits and even mortgage interest can be more complicated. Just as with divorce, some property is community and some is not. The taxes of each person have to reflect those differences. (For more, see Community Property vs. Non-Community Property.)
Tax professionals advise figuring out the tax both jointly and separately. The difference may not be worth the hassle of filing separately unless there’s no other choice, such as in the case of domestic partnerships. See IRS Publication 555 for more detailed information.
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’re subject to community property laws? According to the Internal Revenue Service it has to do with your domicile, which is your permanent legal residence. Factors include where you pay state income tax, where you vote, length of residence, and business and social ties, to name a few.
Property in Multiple States
Most of the time property purchased in a community property state using funds earned in a state that isn't one won’t be treated as community property because the funds were from out-of-state earnings. The opposite is also generally true. Property purchased using money earned in a community property state remains community property regardless of where it’s purchased or located.
The Bottom Line
Only nine states are classified as community property states, but state laws vary, and some learn more toward community property than others. When spouses can agree on an equitable distribution of assets, community property laws become largely unimportant. It’s only when the court has to decide how to structure the division that they become the deciding factor. (For more, see State Laws Dictate Division of Joint Property.)