Understanding Community Property Law

Community property is property jointly owned by a husband and wife. This typically includes all money earned, debts incurred and property procured during the marriage. There are eight community property states:

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

In these states, community property law states that spouses equally own and owe property and debt, regardless of which party spends or earns the income.

Property Classification

Community property states classify married couple’s joint property as:

• Any income received by either spouse during the marriage.
• Any real or personal property such as homes, furniture, appliances, vehicles or luxury items acquired with income earned during the time of the marriage.
• Any debts that are obtained during the marriage.

There are several items that are not considered community property such as:

• Any property owned by the husband or wife previous to the marriage.
• Any property purchased after a legal separation.
• A gift or inheritance during the marriage from a third party as long as it is not placed in a joint account.
• Any debts obtained individually before the marriage.

If one of the spouses passes away, his or her half of the community property will go to the surviving spouse unless he or she left a will that declares otherwise.

Divorce & Community Property

If your clients live in one of the eight community property states and are getting a divorce, they and their spouse will have equal rights to any community property in question. All assets will be divided equally.

The court will not determine whether it would be fair to give one spouse a right to more than half of the assets. If your client does not live in community property state, a judge will usually divide property “fairly” based on:

• The financial situation of each spouse
• Who has primary custody of any children
• Each person’s earning potential

Community Property Law & Home Loans

If your client lives in a community property state, community property law can have a big effect on how they purchase a home and get a home loan. Even if their spouse is not purchasing the home or borrowing for a home loan, their signature will often still be required—usually to show that they aren’t a borrower. Even then, their credit and debts can affect your client’s personal debt to income ratio.

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The above information is for educational purposes only. All information, loan programs and interest rates are subject to change without notice. All loans subject to underwriter approval. Terms and conditions apply. Always consult an accountant or tax advisor for full eligibility requirements on tax deduction.