Living in a community property state means that when a couple divorces (or ends a Committed Intimate Relationship), courts must characterize all property as either community property, or separate property before it can be awarded. Community property falls into those two distinct categories: separate property and community property. Yet, it gets complicated because while courts will typically award each spouse all their separate property, and half of the community property, even separate property can be on the block, if it is necessary for the court to make a fair and equitable division between the parties.
Simply put, community property is what spouses own together after the date of marriage (i.e., the marital community). Separate property is what spouses own individually prior to the marriage, or as a result of inheritance, personal injury pain and suffering settlement, gift, etc. Both assets and debts are considered community property. The court will presume all property is community, unless and until a party can prove otherwise.
Commingling Happens
Does property automatically remain separate no matter what? Nope. Commingling is a super important concept to understand. It occurs when spouses get their separate property and community property hopelessly intertwined, making it impossible to determine where the separate property ends, and the community property begins. In other words, it becomes impossible to trace. That mixed-up jumble becomes community property in the court’s eyes. Simply put: commingled funds = community property. Parties must be diligent in keeping good records (i.e., tracing) to prove that separate property is separate.
Wages of Both Parties are Community Property
The wages of both parties are considered to belong to the community—regardless of whether one spouse makes considerably more than the other. Yes, they are still community property even if you keep them in a separate bank account.
Line in the Sand
For the purposes of property characterization, courts typically consider a marriage to be over when the spouses informally separate. When does that happen? When a couple stops living together with the intent of ending the relationship and begins living separate and apart. This is true even if only one party moves out and wants the divorce, while the other party wants a reconciliation. Only one party must declare the marriage to be over. One party cannot hold the other prisoner in a marriage.
Gifts
What if Aunt Bessie gifts the wife was a lovely house and $250,000, while married? Gifts are the separate property of the recipient, even if given/received during the marriage, and even if the couple decides to live in the house. The party who receives the gift, should be able to prove it was given exclusively to them, and not to the parties as a couple. Like gifts, Washington State courts consider inheritances to be separate property. Usually, a will or other legal documents will quickly set straight any claims by the other spouse of the benefactor’s intentions as to who the recipient of the gift was intended to be.
What if the wife sold the house she was gifted (above) and net a pretty penny, how would that money be kept separate? The good news is that when a party sells a separate property asset, the funds that come from the sale, keep the original characterization (as separate property in this case). UNLESS, THE FUNDS FROM THE SALE GET COMMINGLED WITH COMMUNITY PROPERTY FUNDS. If the accounting can no longer substantiate that the asses is solely separate property, they will go into the community property bucket. Which brings us to tracing…
Tracing
What if the wife takes some of those separate property funds and buys a new washer/dryer set for the family. Guess what, that washer and dryer set are still her separate property, even though the family enjoys the use of them. In other words, the washer/dryer can be “traced” back to the original separate property. The thing about tracing though, is the burden is on the wife to keep the records to prove this. If she can’t…well, you guessed it: the washer/dryer become community property.
Improvements
What if the house left by Aunt Bessie needs some improvements? Rule of thumb: Any home improvements made during the marriage create a community property situation, since labor is an asset of the community, unless the non-owner spouse is compensated for their work, and receives credit for any improved value to the dwelling. For instance, if an improvement cost $50,000 which the husband pays for from his separate property, and the value of the home increases by $150,000, then $50,000 of the improved value would remain the husband’s separate property, as it can be traced back to separate property and he would be entitled to be compensated a wage for his time, toil, efforts. The improved value of $100,000 would be considered community property (less any value the husband may receive from living in the house rent free). Caveat: Small repairs and routine maintenance made to the home by the husband will likely be disregarded by the court when characterizing property as benefit of living there rent free.
Can Property Be Partly Separate and Community in Character?
Yes! Think of it this way: A newly married couple decides to buy a house for $500,000. Husband has a bit more saved up, so he uses his separate property savings to make the $50,000 down payment. The couple takes out a mortgage together to cover the rest. Effectively, the husband put down 10% of the value of the home–so that $50,000 down payment remains the husband’s separate property. The remainder of the mortgage is community property debt. So, if the house is sold, the first $50,000 goes back to the husband as his separate property.
Let’s say the house appreciated in value. Any increased value of the asset keeps its proportionate character. For example, that 10% of the husband’s separate property gets 10% the value of the appreciation, just as the 90% owned by the couple as community property is accordingly valued. Therefore, despite the appreciation, the house remains 10% separate property and 90% community property.
Whose Name Will the House Be in?
Using the house above as an example would it be one spouse, the other, or both? It doesn’t matter because the name on the title won’t change the characterization of the asset. In fact, often the court will not even consider whose name is on the title because regardless of what the title says, character is determined at the time of purchase. Likewise, if the loan or the mortgage is refinanced, the new loan retains the character of the previous loan. Nor is characterization affected by who makes the payments on the home. Think of it this way: if a couple lives in a home that belonged to one of the spouses prior to marriage, that home would be considered that spouse’s separate property. But, the mortgage payments are being paid by community property assets. The home would remain separate property, even though community property helped to pay down the loan value of the home. Why? Because the marital community (i.e. the couple) live in that home without paying rent. Rent has value, and will offset any mortgage payments the community paid.
What about rental home income? Rental income typically takes on the character of the asset. In other words, if the rental home is separate property, any rent derived as profit would also be considered separate property—as long as those proceeds are not comingled in a community property bank account.
Division of property can be very frustrating and confusing. I can help you get everything that is coming to you! I am here to help you through the legal steps, and support you through the process. Please contact me at: [email protected]
Disclaimer: The information presented here is for general informational purposes and does not constitute legal advice.