At its core, “community property” is a fancy way of saying “each partner takes half of whatever was earned during the marriage.” While this is a straightforward analysis for most divorcing couples, nuances do come into play. Essentially everything earned in a marriage is “community property.” (including wage income). So is the appreciation of community savings like stocks, bonds, and real estate.
The polar opposite of “community property” is “separate property.” Property that was accumulated prior to the marriage or was gifted to one of the spouses is deemed “separate property.” Separate property remains “separate” in divorce, and the other spouse has no claim to separate property when a marriage ends. One common nuance when classifying community and separate property is the existence of “commingled” (also called “transmuted”) property assets. Commingled assets are those assets that were originally separate property before the marriage, but became community property during the marriage. This happens when the originally separate property assets are benefitted by the parties’ community property.
Two common examples are:
1. Real Estate—the marital home sometimes begins the marriage as separate property when the purchasing spouse buys the home before the couple gets married. Before getting married, the purchasing spouse titles the deed and mortgage in their own name. Over the years though, when “community funds” are used to pay the mortgage or improve the property, the marital estate has a claim to the appreciation in the home, and each partner has an undivided claim to one half of the marital estate. However, at this point, the spouse who purchase the home still has an argument that their down payment is separate from the marital estate, and when the parties divorce, the purchasing spouse gets his or her down payment back.
Sometimes matters get cloudy though, because parties re-finance the home after they get married. When this happens, the contributing partner loses their “separate” property down payment for the home and the real estate asset is fully commingled. At that point, each spouse owns half of the property despite the fact that one spouse did not contribute at all to the home’s down payment.
2. Bank accounts—when parties have separate bank accounts prior to marriage, the accounts only remain separate if community property doesn’t make its way in to the account. When community property enters the “separate” bank accounts, the character of the bank account is commingled, and each partner is then capable of taking one-half of the entire value of the bank account.
Couples in Arizona are capable of entirely skipping the community property stage of their marriage by drafting and signing a mutually agreed upon prenuptial agreement (“prenups”). However, in the year 2022 (when this article was written), prenups remain extremely uncommon in Arizona, and most people end up bound to the default approach (the community property scheme).
Clearly, the community property system is confusing. Give us a call and we can tell you what your rights are under the law.