Community Property vs Separate Property
When people get married, they typically don’t bother to think about what will happen to their assets when they get divorced. In community property states, you have to consider this from the beginning.
What is Community Property?
Community property, also referred to as marital property, are all assets and debts accumulated during a marriage.
In community property states, any asset or debt acquired by either spouse is considered community property even if it was purchased with an individual’s name only on the title of ownership.
This means that both spouses have equal rights to everything in a community property state, whether they paid for it or not.
Community property includes real or personal property, income from wages or salary, and most other forms of compensation for services rendered to another individual obtained by both parties’ efforts.
Nine states that have community property laws are:
- New Mexico
What is Separate Property?
Separate property refers to assets that one spouse acquired before marriage or through inheritance and gifts from third parties (not your spouse).
In community property states, separate property is generally kept by the spouse that owns it. However, a community may have a vested interest in a particular piece of the separate property if a significant effort was used to increase its value or maintain it during the marriage.
Separate property includes:
- inheritances and gifts from third parties (not your spouse)
- assets obtained before the marriage
- property acquired after a legal separation
- gifts to one spouse by the other during a marriage
- inheritances obtained after the other spouse dies
How to Determine Whether an Asset Belongs to the Community or the Spouse Individually?
Each state has its own laws and regulations on how assets should be divided in a divorce. Generally, courts will consider:
- The contribution of each spouse to the accumulation of community property
- The extent to which community efforts increased the value of separate property
- The degree to which a spouse’s time and effort are related or unrelated to community business activities.
When Does Separate Property Become Community Property?
Separate property can become community property if separate assets are mixed with community funds or used to benefit the community.
For example, a business that an individual started may be considered separate property unless it is being run for the income of both spouses.
Another example, if one spouse decides to sell their separate asset (which belongs to that individual) for $100,000 and deposit it into a bank account held jointly with the other spouse during marriage. This would be considered community money because the community is now entitled to half of that money.
In community property states, separate assets may be reclassified as community property if they are commingled with community funds and treated as a joint asset during the marriage.
Dividing Your Assets When You Get Divorced
After a divorce, community property should be divided equally between spouses unless an agreement states otherwise.
Each spouse will receive half of the community funds and assets no matter who holds legal title or how much each individual contributed towards accumulating them during the marriage.
The importance of adequately identifying assets in community property states
Whether you live in a community property state or not, it is essential to identify community assets and separate assets when getting a divorce.
This will ensure that your spouse does not claim ownership of an asset(s) they are not entitled to receive during the division process. It also helps avoid future conflicts about what was supposed to be community and separate property.
Separately owned assets should not be commingled with community funds or vice versa if you do not want them to become community property.
For example, a stamp collection that one spouse inherited will remain the sole and separate property of that individual unless it is placed into joint names (meaning both spouses share rights to the property) with community funds.
If you decide to add your spouse’s name onto a separate asset, make sure it is accompanied by an explicit agreement that states what they are receiving and in exchange for what (i.e., cash or community assets).
This will help avoid conflict when dividing community property between spouses during divorce proceedings.
The Importance of Properly Identifying Assets in a Marriage
It is important to properly identify community property, separate property, and debts acquired by both spouses during the marriage. Reasons for this include:
- This will ensure that your spouse does not claim ownership of an asset(s) they are not entitled to receive during the division process.
- It also helps avoid future conflicts about what was supposed to be a community or separate property.
- This will help prevent conflict when dividing community property between spouses during divorce proceedings.
- It also ensures you are correctly identifying community debts and your respective liabilities so that no one is unfairly held responsible for community debt.
- This will ensure fairness in the division of all properties between spouses.
Community property is owned equally by both spouses, whereas separate property belongs to one spouse or the other.
This means community funds and assets are divided evenly between spouses during divorce proceedings unless an agreement was made before marriage stated otherwise.
Separate property can become community property if mixed with community funds or used to benefit the community without an explicit agreement stating otherwise.
It is crucial to properly identify community property, separate property, and debts acquired during the marriage. Neither spouse claims ownership of an asset(s) they are not entitled to receive or becomes liable for community debt without an explicit agreement in place before marrying.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.