Although we often hear the phrase or words “community property states,” we seldom know the true meaning until we’re discussing divorce. But community property states have several specific rules that are not divorce-related.
Read on to learn about the various community property states, how they differ from other states and what it means to married residents.
Community Property States
Community property is defined as what a husband and wife own together. Currently, there are nine community property states in the U.S.
• New Mexico
Community Property vs Common Law
Although you may believe in the old “yours, mine and ours”, it won’t particularly hold true if you live in a community property state and get divorced. Unless there’s a prenuptial agreement, geography more than actual ownership determines who gets what in a divorce, according to Bankrate.com.
In the United States, states are either community property states or common law states. The main difference between the two is in how property and asset ownership is handled. In a community property states, you keep whatever you bring into the marriage as your own. Anything you obtain after the marriage is split 50/50 between you and your spouse.
In a common law state, anything that has your name on the deed or title is yours whether you’re married or not. You also have the legal right to obtain financing without your spouse’s knowledge. However, if a couple in a common law state gets divorced both people can ask for a share of the property or assets. In many cases, the individual who earns the higher wage gets a higher percent of the property or asset.
Community Property States & Loans
When married persons live in community property states, their income, property and other assets are considered as joint and equally owned by both parties. Community property laws affect couples in all property and income-related matters.
In Wisconsin, for instance, if one party applies for a consumer loan, the bank or lending institution is required by law to notify the spouse. In addition, if the borrower fails to pay the loan, the bank can legally go after the spouse even though the spouse did not sign for the loan.
The same principle applies with mortgages in community property states. A husband who takes out a mortgage loan to purchase a home can have the loan just in his name, but the deed must be in both the husband and the wife’s name.
How Community Property Affects Divorce
As stated above, in community property states, what you bring into a marriage is what you walk away with in a divorce. However, it may not always be that simple. While it may work that way for money and simple assets, it’s not that simple with real estate. Although the original home or property may be owned by one individual at the time of the marriage, if it increases in value, the other spouse is entitled to fifty percent of the increased value.
For example, John owns a house valued at $100,000 when he marries Mary. After five years, they decide to get divorced. The home is appraised at $200,000. John’s equity in the house is $150,000 and Mary’s equity is $50,000, which is fifty percent of the increase in value. Regardless of who earns the money or who spends the money, everything is divided equally between the husband and wife in a divorce. Inheritances and gifts are exempt for community property laws.
How Community Property Affects Income Tax
The Internal Revenue Service has specific rules regarding filing income taxes in community property states. By their rules, all couples that are married, including same-sex marriages, must file as required in community property states. In most cases, the federal law usually follows state laws regarding income and assets.
When filing income tax, each individual must file fifty percent of the community property income and all of the income or assets he or she had prior to the marriage. Because of constantly changing laws, the IRS recommends checking with your state prior to filing.