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 equally split all assets acquired during the marriage.
The states are:
- New Mexico
A 10th state, Alaska, has an "opt-in" community property law that allows such a division of property if both parties agree.
- Community property law requires that a divorcing couple split their assets 50/50, but only the assets acquired in the state.
- The property to be divided does not include assets owned by either spouse prior to the marriage or after the legal separation.
- Only nine states are classified as community property states, but state laws vary, with some leaning more toward the community property concept.
Divorce laws vary state by state with some leaning towards the community property concept. But these nine states are the only true community property states as of May 2019.
The remaining 41 states are sometimes called equitable distribution states. The judge makes a decision on the division of assets on a case by case basis.
Understanding Community Property State
A divorcing couple in one of these nine states is required to equally divide community property, 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.
A prenuptial agreement will almost always override the community property law.
The property to be divided does not include assets owned by either spouse prior to the marriage or after the legal separation. Also excluded are gifts or inheritances received by one spouse during the marriage. Responsibility for any debts that date from before the marriage is not 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 that 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 that was signed prior to the marriage will almost certainly determine the outcome of a divorce, even in a community property state.
As 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.
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 law? According to the Internal Revenue Service, it's determined by your domicile, your permanent legal residence.
Factors that determine your domicile include 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.
Property in Multiple States
Most of the time, property that is purchased in a community property state using funds that were earned in a state that is not a community property state will be 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 will be community property regardless of where it’s purchased or located.
Special Considerations in Community Property
If a married couple files taxes separately, figuring out what is community property and what is not 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 that the difference is so slight it's not worth the hassle of filing separately.