Personal Finance 

Community Property States & What It Means

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You know those common misconceptions people have about money that are just obscure enough to escape further investigation? In other words, things you hear that you probably will never encounter and so you never look into to find out the truth? The concept of community property was one of those things and with the power of the internet, I sought out what that exactly meant.

In a community property state, everything you acquire after you are married is owned by both spouses. Everything you had before you were married isn’t jointly owned, it’s owned by the one who owned it before the marriage. If there is a divorce or some other separation, then the distinction of ownership becomes important.

Why does this matter? Outside of divorce or separation, there are special spousal liability and tax rules you have to follow. For example, if you live in a community property state then each spouse is responsible for half of the tax on communal income. So if Spouse A earns $50,000 and Spouse B earns $10,000, Spouse A is responsible for tax on $30,000 and Spouse B is responsible for tax on $30,000. This gets hairy when you file separately. 🙂

Which states are community property states? Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

No two community property state laws are the same. I didn’t dig too much deeper into this because this is where my interest ended but I read that the various laws of each state differ from one another. For example, California requires a 50/50 split of property whereas others do not. Some divide debts equally as well as assets, but others don’t.

If you’d like to know every nook and cranny about community property states with respect to the IRS, or simply want some mind numbing reading, check out Publication 555.

{ 16 comments, please add your thoughts now! }

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16 Responses to “Community Property States & What It Means”

  1. superdiamond says:

    This is a scary thing for divorces to go thru. I will always say that to marry is to the death and if you can make that commitment, don’t bother. You might pay in a big way! According to this post, if you live anywhere within those states, you are screwed!

  2. eric says:

    Speaking of which…what’s everyone’s feeling on pre-nups? 😀

    • Pablo says:

      Years ago, I’d have been against pre-nups…but after painfully finding out my wife has been running up tons of debt behind my back, and we live in a community property state, I’d have asked her to sign a pre-nup.

  3. Neil says:

    Superdiamond – I wouldn’t say screwed. Actually, it seems fairly reasonable. You continue to personally own everything that you brought into the marriage.

    I guess in extremely lopsided-income marriages, this might seem unfair, but my wife and I keep swapping places as the “principle” earner (currently we have an unusually high difference, as my wife is making about 4k more than me). But then again, if the marriage arrangement is that one spouse stays home to look after house and kids, why should they own less of the property?

    Overall, community property hardly makes you screwed in the event of a divorce. It’s alimony that’s always struck me as the real screw-job. I’ve not understood why someone would have a lifelong obligation to maintain someone else’s lifestyle after a split.

    Not that I disagree with you about commitment.

    • dilbert69 says:

      $4k is a high difference? It sounds pretty small to me.

      • I think Neil means that typically he’ll be $1000 above his wife … then she’ll get a raise and be $1000 above him … then he’ll get a raise and be $1000 above her again … hence the 4K difference is relatively large, compared to the historical difference between their salaries.

  4. Joan says:

    A similar issue that is often unexplored is “common-law marriage.” Most states do not and have never had this policy, but people seem to think it’s true anyway!

  5. Texas Wahoo says:

    Neil is right. Most community property states don’t have alimony. Also, the community property rules mean that what you get is almost entirely dependent on how long you are together. If you’re married for a year, there probably won’t be very much community property.

    One thing to remember though, interest earned on separate property is community property (because it is technically being “earned” during the marriage).

    Also, if you move from another state to a community property state while married, it gets really tricky. They don’t apply CP laws to what was earned in the other state, they usually try to figure out who owned what under the other state’s laws.

    • dilbert69 says:

      I believe that in California you can be ordered to pay spousal support if divorce leaves your spouse much less well off than when you were married. Splitting the marital property 50/50 makes this less likely to be true, but spousal support still exists.

  6. dilbert69 says:

    People who complain about community property don’t realize that in the other states, one or the other spouse can keep _all_ of the marital property. That’s even less fair. In New York, if one spouse moves out of the apartment, the other spouse gets to keep it. That’s why you see couples who hate each others’ guts cohabiting in $10-million apartments on the Upper East Side of Manhattan. Neither one is willing to walk away from that much money.

    • Damon Day says:

      that is an interesting point dilbert, I have never thought of it that way. Although with this economy that sort of thing is happening everywhere, even in community property states. People are just not financially able to get a divorce. Plus another interesting thing, is now couples are fighting over who has to keep the house 🙂 The house is now the hot potato that nobody wants.

      So that brings up a point say in like New York. Does the first mover have an advantage with an upside down property? Meaning if you move out first the other is stuck with it 🙂

  7. jillianlou says:

    This is an important point for estate planning purposes – your property will automatically revert to your spouse, even if it’s a second marriage and you’d rather it go to kids from a first. Make sure you work with a financial planner/estate attorney to title/trust things in such a way to get around this if you wish.

  8. Kate says:

    If you marry in a community property state and one or the other owns his/her home with no mortgage. Is the spouse moving in with said owner of home does this spouse automatically get half of the house in case of divorce or death. Does any one know?

  9. Kate says:

    And if the person moving in makes significant improvement that he/she pays for is that portion of the property community or does that remain separate and becomes his/her share later…

  10. Pablo says:

    I hope there is a major push to change the community property laws…not only upon divorce, but when a spouse who ran up tons of debt dies, then, in places like California, the surviving spouse, even though he had nothing to do with the debt, is suddenly saddled with it. This really needs to be changed.

  11. Judy says:

    we live in Arizona my husband is dieng. what happens to gifts that he has given me and I have given to him if nothing is written down.

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