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What Is Community Property?

Kevin Graham7-minute read

November 10, 2022

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Ownership rights and who will have them are a key concern in any real estate transaction. Community property laws in your area could give your spouse an equal stake in your property regardless of what the title says. Here’s what you need to know.

Community Property Defined

Community property is a legal framework used by certain states to determine how ownership rights are held between spouses. Although we’ll get more into the details in an example below, you can think of community property as allowing for a 50-50 split of property and assets acquired during marriage.

Property acquired during marriage is referred to as marital property and community property is one way of determining spousal rights. This is important because these issues often come up in divorce and probate proceedings. Absent other agreements prior to marriage, in community property states, assets gained in marriage are typically split equally, with limited exceptions.

It’s important to note that if you have a prenuptial agreement, this supersedes state laws regarding property distribution. You agree prior to marriage what each spouse gets in the event of divorce.

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How Does Community Property Work?

California is an often-cited example of a community property state. Here, assuming no prenuptial agreement, most property or assets acquired during marriage are subject to equal distribution in the event of divorce.

If Kelly and Taylor have a house worth $800,000, one person would have to pay the other $400,000 to keep the property if they divorced. Likewise, there is an equal split of money in bank accounts that was earned during the marriage and the value of any cars the couple may have acquired during marriage.

These are just a few areas to think about, but in most cases, community property states give spouses equal rights to all property acquired during the marriage. That doesn’t mean this is always the case.

Are All Assets Owned By Spouses Subject To Community Property Law?

Not everything spouses have at the end of the marriage is subject to community property law. There are exemptions. Let’s run through them.

In The Case Of Divorce

No one plans for divorce, but it happens. Here are the common exemptions to community property law.

Property Owned Before Marriage

Community property law often doesn’t apply to property one spouse or the other brings into the marriage. Property that you already have can be treated as sole and separate property if you choose. You have the choice of whether to add your spouse to the title.

For example, if you have a house or car that you owned before getting married, your spouse doesn’t have rights to that asset without you legally giving them rights by adding to the title.

Property Bequeathed To One Spouse

If you inherit property on your own, your spouse doesn’t automatically have rights to that, either. It’s yours unless you give them the rights to it.

This is pretty straightforward in the case of a physical item like a car, treasured item or a family home. Where it gets a little complicated is when you inherit cash or other financial assets. If you put the money in an account your spouse has access to, those assets are now co-mingled and there’s a chance a court would consider that subject to a 50-50 split. Speak with an attorney.

In The Case Of One Spouse’s Death

If property is to be divided in the case of death, a lot of it comes down to what’s in the will. However, even here there are some exemptions.

All Property To Spouse

If you live in a community property state and you don’t have a will, the property typically goes to the spouse. The thinking here is that in the absence of specific instructions, things should go to your life partner.

Marital Home To Spouse Regardless Of Will

Generally, if it’s a home you own during marriage, that home goes to your spouse even if you have a will in place. It’s the home you’ve made your life in together.

It should be noted that this isn’t unique to community property states. In states with dower rights, ownership rights are transferred to the spouse upon the death of the person on title. In states that have homestead rights, a spouse has property rights by virtue of it being their primary residence.

Why Were Spousal Rights Laws Created?

In the last 50 years, the roles and economic freedoms enjoyed by women in the U.S. have greatly expanded. Many of us now take for granted that women are full and equal members of society, able to make all their own decisions regarding their occupation, economic and personal interests. But it wasn’t always that way.

Laws governing spousal rights date back to a time when husbands had to sign off on many of the decisions regarding property, finances and other items. According to the law, a woman would often be considered to have an existence that was not separate from her husband. As a result, many of these laws were created so that a woman would have some means of support if her husband divorced her or passed away.

Obviously, society has come a long way, but the law can be a slow-moving institution. Often, the pace of law creation doesn’t keep up with changing societal norms.

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What Other Ways Are There To Divide Marital Property?

Throughout history, various societies have had to come up with ways to resolve issues related to the end of a marriage or the settling of an estate. The system of community property has its origins in Spanish law.

The laws regarding marriage, and the disputes and settlements surrounding it are generally left to individual states. Given this, they’ve come up with varied approaches.

Equitable Distribution

Equitable distribution states require that property be divided fairly between spouses. This might sound like a 50-50 split, but it’s not. Courts are asked to judge the fairness of settlements based on a number of factors that may be different from state to state. As an example, New York is an equitable distribution state. Courts must look at the following, just a few among numerous listed considerations:

  • Income and property of each spouse going into the marriage and at the time of the divorce
  • Marriage length, ages and relative health of the spouses involved
  • Who has custody of any children and do they need to live in the marital home?

Hybrid Systems

In some states, hybrid systems exist. Let’s take Texas as an example.

Texas is primarily a community property state, but judges are given some discretion to determine what’s fair given the circumstances surrounding the marriage itself as well as the divorce. The split between spouses is not required to be exactly even.

Can I Avoid Community Property Laws?

As we discussed briefly earlier, you can have a legally executed agreement such as a prenup or a will which take precedence over existing community property or other state laws regarding distribution of property in a divorce or upon depth. Assuming the documents are properly formatted and pass legal scrutiny, courts defer to these in determining distribution of property and assets.

Community property and similar laws are intended only to help resolve issues when parties haven’t previously put their intent in writing in a legally binding agreement.

Sign A Prenup

A prenup, or prenuptial agreement, is a legal document dictating division of property and assets in the event of a divorce. The agreement is signed before marriage so that you don’t end up making rash decisions in the future if and when you no longer have good relations with your spouse.

Draw Up A Will

In the event of death, drawing up a will for how your property and assets should be distributed makes sure that your estate is handled in accordance with your wishes. There are exceptions to this in states with dower rights and homestead property, where a residence that you both lived in may go to your surviving spouse.

While a will is one way to do this, there are other ways to handle estate planning, such as a living trust. For example, grandparents could give their children access to money or other assets only after they’ve reached a certain age through a trust. We recommend discussing your specific wishes with an attorney specializing in estate planning to find the right option for you.

Depending on the complexity of your finances, a will isn’t always necessary. If you have basic things like retirement or bank accounts and insurance policies, you can designate a beneficiary to receive the funds should you pass.

Which States Are Community Property States?

Nine states have community property laws:

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

Alaska, while not one of the nine community property states, offers community property as an option for a married couple to include in a written contract, and it’s not mandatory like in the other states.

Are There Tax Consequences To Living In A Community Property State?

There are certain situations in which special tax consequences can arise in community property states. For example, even if you own property separately from your spouse going into marriage, if they do anything to add to the value of the property, like adding a bedroom, it could be considered marital property and subject to equal divisions in the divorce and for tax purposes.

Another thing that might come into play is complications around calculating the cost basis of inherited property if you both use it and it becomes a marital asset. The best thing to do is consult a financial advisor or tax preparer in addition to your divorce attorney.

The Bottom Line: Community Property Laws Affect Property Distribution

Community property laws are intended to split property gained during marriage 50-50 in the absence of other agreements. If you have legally binding documents expressing your wishes for property and assets signed prior to marriage, those documents apply before any laws.

If you’re going through a separation and need to know more about the home loan implications, you can read more about divorce and refinancing your mortgage.

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Kevin

Kevin Graham

Kevin Graham is a Senior Blog Writer for Rocket Companies. He specializes in economics, mortgage qualification and personal finance topics. As someone with cerebral palsy spastic quadriplegia that requires the use of a wheelchair, he also takes on articles around modifying your home for physical challenges and smart home tech. Kevin has a BA in Journalism from Oakland University. Prior to joining Rocket Mortgage, he freelanced for various newspapers in the Metro Detroit area.