Marriage and love generally form a simple equation – two people meet, they fall in love, and then they wed. However, for married couples residing in California, before reaching “happily ever after,” each spouse should consider California’s law on property characterization. While many are aware that California is a community property state, what exactly does that mean? Essentially, California treats all assets and debts acquired during marriage by a married couple as belonging to both spouses.
Knowing about community property is important for a married couple because there are legal and tax implications attached. Typically, property acquiredduring marriage fits into one of three categories: separate property, community property, or quasi-community property.
Separate property is typically property a spouse owned before marriage. Some property, though acquired during marriage, can still be categorized as separate property, such as gifts or inheritances. At divorce, these properties belong entirely to the spouse who acquired the property so long as the separate assets were not comingled with community property.
Community property, on the other hand, is property acquired by a married person during marriage while living in the state. Usually, income earned during marriage or property purchased from a community bank account is considered as community property. At divorce, community property is typically divided equally. Even if the community property is titled in the name of only one spouse, at divorce, both spouses will likely get a shareof the property. In addition, there are federal tax implications attached to
community property. For example, the community property receives a step-up or step-down in basis to the fair market value at the date of death, whereas the surviving spouse’s separate property does not. This step-up in value can save a lot in taxes on capital gains as the property’s value is stepped up to fair maket value at the date of death.
Lastly, quasi-community property is property acquired during marriage in a non-community property state (e.g., New York) that would have been community property if it had been acquired in a community property state (e.g., California). In California, quasi-community property is treated as community property when one spouse dies or if the couple divorces.
Love may be blind, but when it comes to property, you don’t have to be.