What Is a Community Property State and How Does It Impact Finances?

Quick Answer

In community property states, spouses are considered joint owners of nearly all assets and debts acquired in marriage. However, most states use common law, which allows spouses to own property individually. The type of law your state follows dictates how property is divided upon divorce or death.

A divorce lawyer wearing a suit writes on a document while meeting with a couple.

The laws around who owns what in a marriage vary from state to state in ways that make a huge difference in how assets are divided upon death or divorce. Most states abide by common law, where an asset is owned by the spouse who acquired it unless it's owned jointly. But nine are community property states, where marriage means you legally share income, assets and debts (with some exceptions).

In a community property state, divorcing couples are required to split all assets acquired during the marriage equally. The word "property" doesn't mean just physical property, but also financial assets and debts.

How Community Property Laws Work

When you live in a community property state, most assets you earn or buy and debt you incur during the marriage are considered community property. That means even though your spouse bought something or earned a bonus, or you took out a loan in your name, you are both equally responsible. That is, unless a prenuptial agreement states otherwise.

If you divorce, the assets must be split equally, though there are some exceptions. If one spouse dies, the half of community property belonging to the deceased spouse goes to the surviving spouse unless indicated otherwise by a valid will.

Assets considered community property must be split in a divorce in a community property state. That includes:

  • Income earned while married
  • Savings and retirement accounts
  • Real estate
  • Personal property, such as cars or furniture
  • Debts acquired while married

Assets such as property or personal savings that predate the marriage are not considered community property. If you'd like to keep it this way, maintain assets in your own name rather than adding a spouse's name to ownership documents, transferring them into joint accounts or using them for joint purchases.

In some divorces, community property may be sold and split, though if the pair is able to communicate, they can agree on how to distribute property in a way that better suits them. Additionally, in community property states, both spouses are typically equally responsible for debt accrued during marriage, even if only one person racked up the charges.

Community property laws may feel unfair if a divorcing person has to give up half of their retirement earnings and savings to their ex-spouse. On the flip side, these laws can help individuals who were reliant on their partners financially, such as stay-at-home parents who didn't have their own income and savings.

Which States Are Community Property States?

So which states operate with community property as the law of the land? These are currently the only community property states:

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

In three states—California, Nevada and Washington—domestic partnerships must also legally operate under community property law.

In several other states, spouses can decide to opt into a community property system or designate certain assets as community property. The states that allow this are Alaska, Florida, Kentucky, Tennessee and South Dakota.

When Community Property Laws Don't Apply

Even in community property states, not all assets are considered community property. Exceptions include:

  • Property protected by a prenuptial agreement, which is created before the marriage and indicates what will happen to the assets upon divorce (overriding community property laws)
  • Property received by one spouse through inheritance, a will or trust fund
  • Property acquired before the marriage
  • Property gifted to one of the spouses
  • Property acquired when the spouses are legally separated and not living together
  • Debts, like student loans, acquired before marriage

Separate property can become community property if it's commingled in a joint account and can't be identified, or its legal ownership status is changed to include a spouse in joint ownership.

Community Property Law vs. Common Property Law

While nine states follow the community property rules above, most states follow common law property rules. Under common law, if someone is the only person named on a document—such as a title, registration document or deed—it's considered theirs and theirs alone.

In common law states, spouses are not considered jointly responsible unless the property is listed under the names of both spouses. This gives partners the ability to keep certain assets or debts as their own, protecting them in a divorce and giving them more choice in who gets their property upon death. During divorce proceedings, however, judges can still make exceptions by assigning debt to another party.

Community property states, on the other hand, default to nearly all assets and debts acquired under marriage to be joint and equally shared.

Common or Community, Credit Still Matters

Whether you live in a common law or community property law state, you maintain your own credit report and score. However, if you and your spouse share a joint credit card or loan, the accounts will show up on each of your reports, so your actions can impact the other's credit.

If you divorce, it's important to work with your ex-spouse to pay off and close joint accounts and to make sure they're not listed as an authorized user on any of your other accounts. If your spouse is deemed responsible during divorce proceedings for paying debt in both of your names, consider free credit monitoring from Experian. This makes it easy to ensure your ex is taking care of debts that impact you, and that your credit report is updated to reflect any changes.