In most states, spouses can purchase and own property separately from one another.
What Is a Community Property State?
In other states, community property laws say that if one spouse purchases property, it is considered the property of both spouses. How marital property is owned has implications for both estate and tax planning.
Which States are Community Property States?
There are currently nine community property states:
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Arizona
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California
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Idaho
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Louisiana
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Nevada
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New Mexico
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Texas
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Washington
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Wisconsin
A few other states (for example, Alaska) allow couples to opt into community property arrangements.
Community property is property acquired by a husband and wife during marriage. In community property states, property held in only one spouse’s name can still be community property. For example, the paycheck that a spouse brings home every week is community property, even though only one spouse’s name is on the check. If that check is used to buy an asset, then that asset is community property, regardless of whose name is on the account or the asset.
What Is Not Considered Community Property?
Property that is not community property is money or items that one spouse brings to the marriage, inherits, or is gifted. A spouse can turn separate property into community property by putting money or items owned by one spouse into both spouses’ names.
Depending on the state, partners may be able to change whether property is separate or community via pre-nuptial agreement, post-nuptial agreement, or exceptions in the law. Changing community property into separate property may be appropriate in second marriages or when one spouse is bringing significant separate property into the marriage.
For example, if, at the time of the marriage, one spouse receives significant income from owning a business, the spouses may decide that it's appropriate that the business remain that spouse’s separate property, and the income from that property will remain that spouse’s separate property.
What Is the Upside of Having Community Property?
One advantage of community property is with regard to capital gains taxes. If one spouse dies, the cost basis of the community property gets stepped up. The current value of the property becomes the cost basis.
This means that if, for example, the couple’s house was purchased years ago for $150,000 and it is now worth $600,000, the surviving spouse will receive a step up from the original cost basis from $150,000 to $600,000. If the spouse sells the property right away, they will not owe any capital gains taxes. In non-community property states, if one spouse dies, only the deceased spouse’s interest (usually 50 percent of the value) is stepped up.
When estate planning in a community property state, it's important to fully review assets to determine which assets are community property and which are separate property. A surviving spouse in a community property state is entitled by law to half of the community property, regardless of how the spouses may have wanted to divide it or share it (such as passing it on to children). Community property can be a factor even in non-community property states if the couple owns property in a community property state.
If spouses move from one type of state to another, it is especially important that they have an attorney in their new state review their estate plan to make sure the plan still does what they want. Find an attorney near you.