What to know about community property states

Nine states have community property laws, which say that all property acquired during a marriage belongs equally to each spouse. This includes real estate. In the case of divorce, these assets are to be divided equally.

Here’s what you need to know about how living in a community property state affects your assets.

What is community property?

Community property refers to assets that you and your spouse acquire while married.

Under community property law, any assets acquired by one or both spouses during their marriage technically belongs to both. Courts assume that each spouse owns all these assets equally.

Assets that typically are considered community property include:

• Real estate
• Earned income
• Debts
• Physical property purchased with money
• Investment securities

What states have community property laws?

The states with community property laws are:

• Arizona
• California
• Idaho
• Louisiana
• Nevada
• New Mexico
• Texas
• Washington
• Wisconsin

Although Alaska isn’t technically a community property state, it allows married couples to choose to apply community property laws during a divorce, even if it’s not the default.

How does community property work?

Here’s an example of how community property works. Say you and your spouse buy a house during marriage for $600,000. You decide to divorce. The mortgage balance is $400,000 and there is $200,000 in home equity. Assuming there’s no prenuptial agreement, you’re each equally responsible for the paying mortgage and each have a right to the equity. In this case, a split would result in you each having $100,000 in equity and $200,000 in debt.

To ensure the assets and debt are split evenly, you can:

• Sell the home and equally divide the proceeds
• Or one spouse can buy the other’s share

Community property laws also apply to physical assets like vehicles and valuables. The same goes for debts. If you took out a student loan while you were married, your spouse may be responsible for paying it back even if their name isn’t on any of the documents.

What isn’t included under community property?

While community property states have different rules on what constitutes community property, they generally exclude the following assets:

• Property owned before marriage. Any assets, like a home bought before you got married, are considered separate property.
• Gifted or inherited property. Any property or assets, like cash or a car, you inherited or received as a gift before you were married, don’t need to be shared equally with your spouse in the case of a divorce.
• Property specifically excluded. Items listed on a prenuptial or postnuptial agreement will override any community property laws. That is, if the document clearly outlines the agreement for dividing up the property following a divorce.

Applications of community property law

Community property laws are most relevant in scenarios such as death, divorce, and a change of domicile

Divorce

When you divorce in a community property state, a judge will usually rule how assets are divided according to community property laws if there is no prenuptial or postnuptial agreement.

Death

When one spouse dies, community property laws may help the surviving spouse maintain ownership of shared property, like a home. That way, the surviving spouse inherits full ownership and responsibility for the home and the remaining mortgage, whether their name is on it or not. You can then choose to keep the home or sell it and keep the proceeds.

Change of domicile

If you live and get married in a common law state, then move to a community law state, then only some of your assets are divided 50/50. In this scenario, only assets you’ve acquired in the community property state have to be split equally.

For example, if you purchased a car together while living in a community property state, then you have equal rights to that vehicle. However, a car your spouse purchased before the move isn’t.

The law also applies when you move to a common law state from a community property state. That car purchased while living in the former state will need to be split 50/50, even if you’re now living in a common-law state.

Physical separation

Married couples that live in California, for example, may have a different set of rules when it comes to community property. If you’re physically separated, then community property laws can stop applying to them if there is a clear intent to permanently end the marriage.

Since this rule can be complex, it’s best to consult a divorce attorney to understand the types of proof needed and how that applies to your situation.

Can you avoid community property laws?

It’s possible to avoid community property laws if you take specific steps.

Sign a prenuptial agreement

Signing a prenuptial agreement can offer clearer guidelines on how you and your spouse want to control assets. You can declare exactly how to divide property during a divorce, including real estate, retirement funds, and physical assets. You can even stipulate whether either spouse will receive a lump sum payment for assets you both own while married.

Draw up a will

You can draw up estate planning documents stipulating how assets are disbursed, regardless of whether you live in a property state. Having a will or a trust can outline how you want your assets, like your home, savings accounts, vehicles, and retirement funds divided after your death.

For example, you can state that 75% of your savings go to your spouse, and the remaining 25% to your adult children.

Variations of community property laws

There are variations in community property laws among the states that practice it, including:

• Absolute community property. All property owned by either spouse under this rule is considered joint property once married. That’s even if the assets were considered separate.
• Community of acquests and gains. Each spouse owns half the interest in all property acquired during the marriage. Assets that may be excluded include gifts made to one spouse, assets inherited by only one spouse, property acquired before the marriage, or property that one spouse acquired when either was permanently living apart.
• Community of profit and loss. Spouses are individually responsible for any debts they’ve acquired on their own. You won’t be responsible for paying off any debts that your spouse racked up, even while married.

The bottom line: Community property ensures equal distribution of assets

Understanding how laws work when living in a community property state is essential to protect your assets during a divorce or the death of a spouse. Don’t let the rules prevent you from making any major financial moves. Steps like drawing up a will or a prenuptial agreement will override community state laws.

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