California Community Property Laws: Community Property Vs. Separate Property

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Most people living in the state know that California is a community property state, yet few have a good understanding about what that means. But you probably should, since community property laws can have a profound impact on a married couple's finances, rights and responsibilities. If you are married or thinking about it, there's no time like the present to get an overview of the impact of California community property laws on marital property.

Why Do States Have Marital Property Laws?

Every state has a law that sets out a system for dividing marital property between the spouses when the marriage ends. You may have heard the statistic that half of all marriages end in divorce, although the exact numbers depend on the study. But the reality is that all marriages end, either by divorce or by death, and it's often as important to distinguish one spouse's property from that of the other spouse in probate as in divorce court.

Marital property laws provide courts with an outline of how to divide the property belonging to a married couple when that relationship ends. The two primary methods used in this country are termed community property and equitable property distribution.

Any couple can decide to use a different system of property division and sign a valid prenuptial agreement setting that up, and some do. Most people getting married, however, close their eyes and hope for the best, so the marital property division laws of their state apply when they divorce.

Community Property vs. Equitable Distribution

Most states use equitable division as the default method to divide marital property. The term "equitable division" is not the same as equal division, so it won't necessarily result in a 50/50 split. A family law judge in an equitable distribution state divides the property in a way that seems fair to both parties, factoring in the length of the marriage, the earnings of each spouse and a determination of fault in the divorce.

In a community property state, all of the earnings of both spouses during a marriage are considered to belong to the community. In a divorce, each spouse is entitled to half of those earnings and also to half of all property purchased with community funds during marriage.

Read More: California Law: Community Property

California Community Property Outline

Under California community property statutes, each spouse's property and earnings are classified as either separate property or community property. Separate property belongs solely to that spouse, while community property belongs equally to both spouses.

What is considered community property in California? Community property includes all earnings of either spouse – from the day of the marriage until the day the couple separates. Likewise, all interest earned on those community property earnings is community property, as well as all real and personal property purchased with those earnings. This is true regardless of whether one spouse or both spouses was gainfully employed during the marriage.

For example, imagine a married couple in California with one spouse employed and the other spouse taking care of the home and kids who decide to buy a house with the earnings of the working spouse. Eventually they have more kids and buy a bigger house, turning the original property into a rental, with both properties increasing in value. Any earnings in the bank are community property, as is the equity in both houses and the rental income from the first house. All of those assets belong equally to both spouses.

Community vs. Separate Property in California

Not all property owned by a married person in California is community property, however. California's community property laws also recognize separate property, such as:

• Money earned or property owned by either spouse before marriage.
• Money earned by either spouse after separation.
• Gifts received by a spouse during a marriage.
• Inheritances received by a spouse during a marriage.
• Interest, rents or other income earned from a spouse's separate property.

A spouse's separate property remains the property of that spouse throughout the marriage and is awarded to that spouse in a divorce. The spouse must maintain it separate and apart from community property, since commingling funds can change the character of separate property to community property.

Ownership Documentation Doesn't Control

It's important to keep in mind that the concept of community extends far beyond shared bank accounts and the family home. Every dime either spouse earns during a marriage is community property, regardless of the form the compensation takes.

For example, a spouse's IRA account, Keogh or other retirement account is community property to the extent it contains money earned during the marriage. Paychecks are community property, but so are stock options, profit sharing plans and the equity or goodwill built up in a business a spouse owns. The fact that the savings plan or stock options are in one spouse's name has no impact on the community property laws.

Likewise, if a property is bought and held in one spouse's name, it will be community property if purchased with funds earned or acquired during the marriage. Even property that a spouse purchased before marriage may become community property if the spouse pays the mortgage with a post-marriage earnings.

Reimbursement for Degrees and Licenses

It's a classic story, one spouse works waiting tables to put the other through law school, only to have the marriage end quickly after the spouse with a law degree starts earning a professional salary. How does California community property law treat an educational degree or professional license earned during the marriage with community property funds?

In California, future enhanced earnings of the lawyer in the example above are not community property; the day the couple separates, all earnings of each spouse are the spouse's separate property. But the spouse who earned the law degree must reimburse all of the tuition, books and other school expenses to the community. That means each spouse will be awarded half of that amount.

Quasi-Community Property in California

What is quasi-community property? Not everybody is born and raised in California; some couples move to the state after some years living in another state with different marital property division rules. For example, if a couple lived in Ohio for a decade before moving to California, they may have purchased property there. Since Ohio is not a community property state, the property is not technically community property.

However under California law, real and personal property, which would have been community property had the owner spouse been domiciled in California at the time it was acquired, is termed quasi-community property. It is treated like community property in California.

Community Debt in California

One aspect of community property law that people tend to forget is that each spouse is not only considered the owner of half of the property acquired during a marriage, but also the owner of half of the debt. All debt that a spouse takes on before marriage is that spouse's separate debt, while all debt taken on during a marriage is community debt. That includes credit card debt for either spouse, car loans and house mortgages.

For example, if a married couple owns a house in California that skyrockets in value before they separate, each spouse is entitled to half of the equity. If the market takes a downturn, and the property is underwater, with the mortgage higher than the property's market value, each spouse is liable for half of the remaining debt when it is sold.

It pays to get legal advice before dividing up debt in a divorce. While it may seem easy to ask the court to simply assign 50 percent of credit card debt, for example, to each spouse, that only works if both spouse's pay their share of the bills. Creditors will not be bound by the divorce court's order splitting the debt between the spouses. So, if spouse #1 pays 50 percent of the couple's joint credit card debt, but spouse #2 doesn't pay the rest, the credit card company can hold spouse #1 accountable for the remaining debt.