Divorce can be a long and messy process, even if the spouses parted on good terms. Weighing up each partner’s contributions to the marriage and therefore how the assets should be split can lend itself to all sorts of bitterness and fighting. Some states, in order to overcome these lengthy and contentious divorce proceedings, have adopted community property law. In these community property states, all assets purchased in the marriage by marital funds are split 50/50 between partners. This has had a beneficial effect on the court’s time now that they are not booked up by divorce proceedings.
What Is Community Property Law?
Community property law is based upon the principle that all marital assets are owned by the couple rather than an individual person. Thus, unless there is a prenuptial agreement, all marital assets are split 50/50 , often being sold in order to do so.
In community property states, assets such as real estate, savings, and stock portfolios are obviously split in a divorce. But some people don’t realize that retirement accounts and even personal property must be evenly split too.
Just as property and assets must be split 50/50, so too must debt.
Is Everything Considered Community Property?
Not everything is considered community property. Each community property state has slightly different laws, but in general, community property is the property that is bought while married by marital funds. Therefore, property owned by one of the spouses before marriage is not considered community property but the property of the owner. Similarly, if one of the spouses buys a property before they are legally separated, then it may also be considered community property, even if they were in the middle of divorce proceedings. In a community property state, it does not matter if the asset is in one spouse’s name alone, only if it was bought during the marriage.
Inheritance of one spouse is also not community property if it is only left to one spouse. However, if marital funds are used to maintain it, then the portion that marital funds are used towards is considered community property. For example, if one of the spouses inherits a house and they use marital funds to renovate it and pay inheritance taxes, then the amount of marital funds used and the value it created is considered community property.
Which States Are Community Property States?
9 states are community property states. They are Nevada, California, Arizona, Texas, Wisconsin, Idaho. New Mexico, Louisiana, and Washington.
Washington, California, and Nevada also apply community property law to domestic partnerships, not just marriages.
Alaska is not a community property state but allows couples to opt-in to community property law to make divorce proceedings move quicker.
The community property states are:
- New Mexico
Under community property law, debts obtained in marriage are also split evenly. Retirement account contributions and personal property bought with jointly owned funds will also be considered community property. The law will often rule that the property is community property if there is any contention as to who owns it.
What Is Not Community Property
Community property law also defines what is not considered community property, and that includes personal property that was bought with personal funds or property inherited by one spouse. Here are some examples of what is not considered community property:
- Property purchased by one spouse prior to marriage
- Property gifted to one spouse
- Property purchased when the spouses were legally separated
- Property inherited by one spouse
- Property left in a trust fund or will to one spouse
Do Community Property States Always Follow Community Property Law?
Not always, there are certain things that may negate community property law. For example, if the couple files separate taxes and all indications are that their finances are separate, then community property law may not apply. It is best to consult a tax accountant as well as a divorce lawyer to help you determine what is community property.
Additionally, a prenuptial agreement will overrule community property law because it is seen as a contract that both parties agreed to. The prenuptial agreement does have to comply with all relevant laws in order to override community property laws.
A couple who lives in multiple states may have difficulty determining if community law applies to them or not. For example, if they spend parts of the year in California, New York, and Georgia and do not know which law applies to them. In these instances, the IRS’s domicile classification will be used to determine which state is their primary residence. The IRS takes into consideration personal and business ties, where they are registered to vote and pay taxes, and where they spend most of their time. For example, the divorcing couple may consider New York to be their primary residence and California a holiday home, but they may have spent most of their time in California over the last year.