Community Property
Community property is a marital property system, applicable in nine US states, under which most assets and debts acquired by either spouse during marriage are owned equally by both spouses, with significant implications for estate planning, divorce, and taxation.
The nine community property states — Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin — treat marriage as an economic partnership in which each spouse automatically holds an equal undivided interest in property earned or acquired during the marriage. Property owned before marriage, or received as a gift or inheritance during marriage, remains separate property belonging solely to the receiving spouse, provided it is kept separate and not commingled with community assets.
The community property system has meaningful estate planning implications. At death, each spouse can only dispose of their half of community property through their will or trust — they cannot unilaterally leave the other spouse's share to someone else. This is a critical distinction from the common law separate property system used in the other 41 states, where the title of an asset generally determines ownership.
For federal income taxes, community property enjoys a significant advantage: when a spouse dies in a community property state, both the deceased spouse's half and the surviving spouse's half of community property assets receive a step-up in cost basis to the date-of-death value. In a common law state, only the deceased spouse's share — typically half of jointly titled property — receives the step-up. This full step-up feature can eliminate substantial embedded capital gains.
Divorce in a community property state generally results in equal division of marital assets, which differs from the equitable distribution standard used in most other states. Prenuptial agreements can modify community property rules and define which assets will be treated as separate property, making them an important planning tool for people with significant premarital wealth or anticipated inheritance.