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1031 Exchange Issues: Community Property States and Laws 

Community Property Laws

In most states, ownership of property by married couples is governed by common law. That is, the ownership of the property depends on how it is "titled", or "vested", or held, by the investor or investors.

Community Property States

However, a few states have adopted special laws or statutes regarding property ownership by married couples. These special statutes, known as "community property" laws, change the common law rules that would otherwise govern.

In community property states, married persons are considered to own their property, assets, and income jointly. If married people decide to file separate tax returns, they must follow their state rules for community income. Generally, both spouses must combine their total income, and divide that income in half. Each spouse then reports half of the joint income on his or her income tax return.

The nine (9) states that currently have community property laws are:

  • Arizona
  • California
  • Idaho
  • Louisiana
  • Nevada
  • New Mexico
  • Texas
  • Washington
  • Wisconsin

(Note: Wisconsin is not really a true community property state, but its laws regarding property ownership by married couples bears a strong resemblance to the law of these states.)

Sole and Separate Property

In a community property state, a spouse's separate property generally includes:

  • All of the property the spouse owned before the marriage.

  • All of the property acquired by the spouse after the couple has legally separated.

  • Any property a spouse receives as a gift or inheritance during the marriage (as long as it is kept separate from the couple's community property).

Community Property

Community property includes the following items:

  • Any income that a spouse received from his or her job during the marriage. (A written agreement may be required to confirm that income is separate property.)

  • Any property a spouse acquires with his or her employment income.

  • Any property, though originally classified as separate property, that becomes community property under the state's laws. This occurs most often when one spouse makes a gift of his or her separate property, or allows the separate property to become co-mingled with community property.

These are only general rules, and investors should always consult with their legal and tax counsel before deciding how to hold or take title to your property.

Properly classifying property as separate or community property depends greatly on the kind of property involved and what state you are in. For example, ownership of business interests and pension benefits are sometimes difficult to characterize, especially when an interest in the property existed before the marriage occurred. 

Common Law States

Life is somewhat simpler in common law states (ie. states other than the nine (9) community property states).

In most cases, the key to property ownership depends on whose name or names are on the title. If there is no title document, such as with a computer, household furnishings and many other items, then the person whose income or property was used to pay for it is the owner. If the married couple's joint income or joint funds was used, then the property is jointly owned.

 

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