Community Vs. Separate Property: What’s The Deal?

16 Mar Community Vs. Separate Property: What’s The Deal?

In community property states, most property acquired during marriage, except for gifts or inheritances, is considered community property — owned jointly by both partners — and is divided in the event of divorce, annulment or death.

What states are community property states? They are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.

Unless there’s specific evidence to the contrary, the law assumes all assets belonging to a couple — wages, salary, self-employment income, houses and cars — make up community property.

The community property system is usually justified by the idea that such joint ownership recognizes the theoretically equal contributions of both spouses to the creation and operation of the family unit.

Interestingly, income from 401(k)s and other types of pension is divided into community and separate income based on the length of participation in the pension and the length of marriage. So, if an individual participated in a pension for 30 years and was married for 15 of those years, 50 percent of that income is community income.

For reporting taxes? Each spouse reports 50 percent of total community income on his or her tax return when filing separately.

In states that don’t have community property laws, assets are owned by the name that appears on the deed or registration. Separate property is property that was owned before marriage or never shared by spouses and includes gifts, inheritances, and property that was acquired in one name and never used to benefit the other spouse.

This includes property that both spouses have agreed to convert to separate property through a legally valid spousal agreement — including certain personal injury awards. Investment income from separate property is considered separate income. Income from IRAs is always separate income, as are Social Security benefits.

For tax reporting, each spouse reports 100 percent of his or her individual — separate — income when filing separately. Separate property is owned by one spouse only. It’s property that a spouse brings into the marriage or receives during the marriage.

While separate property is defined in different ways state by state, there are general rules that apply, as noted in the following situations:

• One spouse inherits property or receives property as a gift, which is never commingled with marital property.
• One spouse acquires property during the marriage in her or his name only and never uses it to benefit the other spouse or the overall marriage.
• Property is separate as agreed on in writing, meeting state standards for mutual agreement.
• Personal injury awards (awards that pay for lost earnings) can be considered marital property, but awards for pain and suffering can be considered separate property.

Generally, in California income is marital income and debts are marital debts, unless both parties agree otherwise in a separate written document.

What you share and what you own in a marriage is a matter of geography: Knowing the laws of your state can be helpful before, during and after your marriage. These are just the basics of what can be a very complex set of rules. Be sure to work with a qualified professional if you have any questions about what rules apply in your situation.