Finance Questions

What is Community Property?

Community Property is a form of property ownership, solely between husband and wife, recognized in community property states as follows:

• Arizona
• California
• Idaho
• Louisiana
• Nevada
• New Mexico
• Texas
• Washington
• Wisconsin
• Alaska (Adopted an optional community property system)

Specifics in law differ from state to state, but the defining feature of community property is this: irrespective of the name(s) on title documents, ownership of (almost) all property - including income from wages and self-employment - acquired or earned during marriage by either spouse is automatically split, so that each spouse owns a separate, undivided one-half interest.
Since the two equal interests of the spouses in community property are separate, each spouse is free to dispose of his/her half of community property in a will, subject to that state's spousal anti-disinheritance laws.
Community property does not automatically pass to the survivor; as it would if owned jointly, with right of survivorship in non-community property states. As a result, the deceased spouse's federal taxable estate contains his/her half of the couple's community property and will be subject to the probate process. Probate may be avoided by using a trust to hold community property assets.
If a couple lives, or has previously lived, in a community property state, he/she should be aware that some special rules apply to community property. Any property they may have acquired while living in one of these states may be considered community property when they no longer reside in a community property state. Since these rules vary widely from state to state, a client should consult with local counsel.
In community property states, property acquired by a spouse separately and brought into the marriage remains separate. In these states, too, property acquired by gift or inheritance, or in exchange for separate property or money, also remains separate. The income, if any, the separate property produces is treated differently among the community property states. As a practical matter, commingling of assets can obscure separate property ownership, until it finally becomes community property. This often happens with checking and other financial accounts.
For more information see IRS Publication 555, Community Property.