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Community Property States vs. Separate Property – Definitions & Laws

By Kandice Bridges

do you live in a community property state or a separate property state?After you get engaged, the first thing you’ll probably do is share the news with your family and friends and update your status on Facebook. After that, your thoughts will turn to setting a date, planning the wedding, and checking out honeymoon destinations. But there are other things to think about as well.

While couples should have serious discussions about finances prior to the big day, they also need to be aware of how their property will be treated from a legal ownership standpoint once they tie the knot. Couples need to understand how states view property ownership – not only in the case of divorce, but also for individual liability purposes in the event that one of the spouses gets sued by a third party.

How Is Marital Property Treated?

Marital property is treated as either community or separate property – and how it will be treated is dictated by state law.

Whether you live in community property or separate property state depends on where you are domiciled. There are nine community property states; the remaining states are separate property states. In community property states, community property is generally shared equally between spouses, regardless of the source of the property. However, married partners in community property states can also have separate property – for example, if they owned it before entering into the marriage.

Determining Your Domicile

The term “domicile” has a very specific meaning for these purposes. Even if you have more than one home, you can only have one domicile. This is your permanent legal home – one that you intend to use for an indefinite or unlimited period of time, and the place to which you plan to return when you leave. Where your domicile is located really depends upon the circumstances.

To determine where your domicile is, you must consider factors such as:

  • Where you pay state income tax
  • Where you vote
  • The location of property you own or rent
  • Your citizenship
  • Your length of residence
  • Business and social ties to the community

The amount of time you spend in one place, however, is not always the determining factor. For example, say you and your spouse own a home or rent an apartment in Texas, have Texas driver’s licenses, maintain banking accounts in Texas, and list your Texas address on your federal tax return. However, you both regularly travel for work every week, with assignments all over the United States. Even though you spend the majority of the year away from Texas, you both consider Texas home – and taking into account all of the factors above, Texas is considered your domicile.

Community Property

Married couples (or some registered domestic partners in certain states) who live in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin live in community property states. The term “spouse” or “married” includes registered domestic partners in the states that allow for such designation (Nevada, Washington, and California).

What Is Community Property?

  • Property that you, your spouse, or both of you acquire during your marriage while you are domiciled in a community property state
  • The part of the property that is bought with community funds (if part of it was bought with community funds, and part was bought with separate funds)
  • Property that you and your spouse agree to convert from separate property to community property
  • Any property that can’t be identified as being separate property

What Is Community Income?

  • Any income from community property
  • Salary, wages, or other payment received by you or your spouse during your marriage
  • Real estate that is treated as community property under the laws of the state where the property is located

Income from separate property in some states, such as Texas, may also be counted as community income. For example, if stock ownership in a corporation is the separate property of one spouse, but pays quarterly dividends, the dividends would be counted as community income. Also, once a couple is married, debts incurred for the benefit of the marital home are considered community debt – although this can be tricky. If you have an issue, consult a tax advisor, financial advisor, or lawyer.

separate property

Separate Property

Unlike the nine community property states, married couples in separate property states typically retain individual ownership of assets acquired during marriage.

1. What Is Separate Property?

  • Property that you or your spouse owned separately before your marriage
  • Money earned while domiciled in a non-community property state
  • Property you or your spouse received as a gift or inherited separately during your marriage
  • Property bought with separate funds or exchanged for separate property during your marriage
  • Property that you or your spouse agreed to convert from community to separate property through an agreement valid under state law
  • The part of property bought with separate funds (if part was bought with community funds, and part was bought with separate funds)
  • Generally, debts that originated prior to marriage are considered separate property

2. What Is Separate Income?

  • Income earned from separate property, which belongs solely to the spouse who owns the property

Final Word

Determining legal ownership can be complicated when a couple moves from a separate property state to a community property state, and vice versa. But regardless of what type of state you’re domiciled in, it is important to identify which property is separate, and which property is community. Making this distinction isn’t important only in the event of divorce – if there is ever a situation in which one spouse is held liable for something (such as  a car accident), the other spouse’s separate property should be shielded from the liability.

In general, it is critical to understand how “your” property will be treated if you’re getting married, divorced, considering divorce, or facing a liability issue. And especially if you have many assets or a complicated situation, it’s best to consult with a tax advisor or lawyer.

Have you ever moved from a community property state to a separate property state, or vice versa? What challenges did you face?

(photo credit: Bigstock)

Kandice Bridges
Kandice Bridges is an author based in Dallas, Texas and writes on a variety of tax, personal finance, and lifestyle topics. She holds a Juris Doctor and a Masters of Law in Taxation from the Dedman School of Law at Southern Methodist University in Dallas. Kandice is married to her college sweetheart, is blessed with a 9-year-old son and 7-year-old daughter, and two rescued dogs, Toby and Eddie.

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Comments

  • http://howimakemoneyblogging.com/ Charlotte @ HIMMB

    Living in Texas I have always understood community property, but I never thought about the issue of separate property. I can see where moving between states over your adult life could cause some very “taxing” issues. Great post!

    • http://www.moneycrashers.com/ Kandicebridges

      Thanks!

  • http://www.wholeheartedway.com/ Fern Alix LaRocca CFP EA

    Here in California, I always advise to use Community Property with Rights of Survivorship so you get step up in basis on both halves.
    -Fern Alix LaRocca CFP EA

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