Posted by Flynn Financial Group Inc

What is Community Property?

What is Community Property?

Community property is a type of joint ownership of property between couples. With some variation between states, all property acquired or purchased by a couple during the marriage belongs to them equally.


What is community property?

Community ownership is the law in nine states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Couples can choose to treat some of their properties as community property in Alaska, Tennessee, and South Dakota, specifying this in a written contract. Still, this type of property is not required in other states.


How community property works

In states where the communal property is the law, the couple's assets are jointly owned, regardless of how the assets are named.

If you buy a house during marriage and just put a partner's name on the record in a community-owned state, the other partner will still be the legal co-owner.

Gifts and inheritances are an exception. If someone gives something specifically to only one of the spouses, that property belongs only to that spouse. If one of the spouses inherits an asset, it belongs specifically to that spouse, whether he/she is currently married or not.

Property owned or purchased by each spouse before the date of marriage is also excluded. Suppose John owned a house before marrying Jane. In that case, she is not considered the same property owner, as the house's acquisition predates the marriage unless it is converted into community property. This can happen if the community money earned during the marriage is used to maintain the asset, such as making repairs or paying insurance premiums.


Types of community properties

Let's take a look at other types of community properties:

Earnings, income, and wages

In community-owned states, John would own half of Jane's earnings, income, wages, and vice versa.


Debts

Debts are also community property. Both spouses owe them equally, regardless of who incurred the debts. If Jane generates a $10,000 credit card account in her name and fails to make the payments, the lender can go after John for the money, even to the point of garnishing his salary.


Community property and divorce

When a couple divorces in a community-owned state, each spouse is generally entitled to half of their marital or community property. In addition, each spouse would be responsible for an equal share of all marital debts.

But divorce laws can vary slightly between community-owned states, so consult a tax professional who practices in your state or knows the law in your state to learn more about state rules. For example, a prenuptial may replace Arizona's community property law. Suppose both spouses give their written consent to a non-communal property agreement, and their agreement follows all the rules for a qualified prenuptial. In that case, your property and debts will be shared, with no community property right.

All other states, sometimes referred to as equitable distribution states, distribute marital property and debts in a manner that appears fair or equitable to a judge or based on an existing agreement between the spouses.


Community property and deaths

As in the case of divorce, the distribution of property in a community-owned state after the death of a spouse depends to an extent on the state. If the couple has an estate plan, the gut laws of the state they lived in would decide who gets what. These laws tend to vary widely between states' community-owned property.

For instance, a surviving spouse in Texas would inherit all community assets if the couple had children, but if the deceased spouse had children from a previous marriage, these children will receive 50% of the parents' community property. The surviving spouse will only receive their 50% share.


Recap 

  • Community property is a form of common property that is the law in nine states.

  • Earnings are jointly owned

  • Gifts and goods purchased before the wedding are excluded.

  • Income and debt are held jointly in community-owned states.

  • Prenuptial agreements can invalidate community property rights if they are explicitly specified.

  • The couple's assets are jointly owned, regardless of how the assets are named.


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