Do you think of the property you and your spouse hold during your marriage as "yours, mine and ours"? That's exactly how community property states view the matter. Community property laws are one way states attribute ownership of assets, earnings and debts between the two spouses when a marriage ends. In states using this system, most property earned or acquired by either spouse during the marriage is considered community property, and belongs equally to both spouses.
Read More: What Are the Community Property States?
TL;DR (Too Long; Didn't Read)
Community property is a way of dividing property in certain states that attributes all earnings of either spouse during the marriage to both parties equally.
Community Property vs. Separate Property
Not every state uses the community property system to attribute earnings and assets between the two spouses in case of divorce. Those that do, including California, classify all of the money earned by either spouse during the marriage as "community property," which means that it belongs equally to the two of them.
Under community property laws, all assets a spouse owns before marriage (and therefore brings into the marriage) are that person's separate property. Money inherited by or gifted to one spouse during marriage is also separate property. When a marriage ends, all separate property is awarded entirely to the spouse owning it, while all community property is divided in half between the spouses.
Community property includes debts as well as assets like real property, vehicles, furniture, stocks and bonds, bank accounts and retirement accounts. It can get tricky to figure out the community property share of one spouse's retirement account that was started before the marriage and continued through it, or a business one spouse brought into the marriage and continued managing during the marriage. But courts have developed methodology to figure out the separate property share versus the community property share.
Note that a couple is absolutely free to agree on a different system of property division before they marry. If both agree, they can keep separate finances or divide their income in some other way. Those wishing to do this should put together a prenuptial agreement after discussing the matter with their respective attorneys.
Community Property Examples
Usually nobody worries about whether property is community or separate before or during a marriage. Rather, the matter becomes important when the marriage is ending and property must be divided. That can be during a divorce or after a death.
It is easiest to understand how community property works with concrete examples. Let's say that Skippy and Dippy marry. Skippy had considerable real estate before the marriage, while Dippy had only a Volkswagen van and $500 in a piggy bank. Skippy earns $6,000 a month and Dippy earns $1,000 a month during their five-year marriage. When the divorce is filed, they have $150 of equity in a home they bought together plus $50,000 in the bank. They also owe $50,000 in credit card debt. How would the court divide the property between them in a community property state?
Skippy would get 100 percent of all of the real property owned before marriage, plus 50 percent of the equity in the marital home and 50 percent of the bank account. Dippy would get 100 percent of the $500 piggy bank money and the Volkswagen van and 50 percent of the equity in the marital home and the bank account. This would be the case even if the bank account was held in Skippy's name and contained only Skippy's earnings, since it was earned during the marriage and therefore is community property. Half of the credit card debt would be attributed to each spouse.
Read More: Are IRA Distributions Community Property?
Community Property States
Nine states have enacted community property laws and use them to determine how to divide up debt and property in a divorce. These states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. Alaska has a community property system but it is optional, and a couple may opt in or out.
Community Property vs. Common Law
Community property laws come from countries with civil law systems like Spain. Most states that do not use community property have equitable distribution laws, requiring the court to divide all property fairly, not necessarily equally. Equitable division state laws come from the common law.
- Legal Dictionary: Community Property
- Free Legal Advice: What is Community Property?
- FindLaw: Community Property Overview
- Legal Beagle: What Are the Community Property States?
- Law for Families: California Law: Community Property
- Law for Families: Are IRA Distributions Community Property?
- Legal Beagle: State of Texas Community Property Laws Regarding Income Taxes
- Law for Families: Difference Between Community Property With Rights of Survivorship vs. Joint Tenancy
- Legal Beagle: Arizona's Inheritance & Community Property Laws
Teo Spengler earned a J.D. from U.C. Berkeley's Boalt Hall. As an Assistant Attorney General in Juneau, she practiced before the Alaska Supreme Court and the U.S. Supreme Court before opening a plaintiff's personal injury practice in San Francisco. She holds both an M.A. and an M.F.A in creative writing and enjoys writing legal blogs and articles. Her work has appeared in numerous online publications including USA Today, Legal Zoom, eHow Business, Livestrong, SF Gate, Go Banking Rates, Arizona Central, Houston Chronicle, Navy Federal Credit Union, Pearson, Quicken.com, TurboTax.com, and numerous attorney websites. Spengler splits her time between the French Basque Country and Northern California.