This "what's yours is mine" post-wedding ownership approach affects not only income, real property holdings and investment earnings, but it also could make a difference in federal tax filings and, if things don't work out, divorce settlements.
Say it 'taint' so
While it might seem simple to keep property separate, real-life actions and transactions can muddy the situation.
"You can have separate property and it can change forms," says David Rosenhouse, CPA and principal of Rosenhouse Group PC in Dallas. "Say you came into a marriage owning shares of IBM in a brokerage account that was in your separate name. You could sell those shares and buy Apple shares with the proceeds that still are separate property."
But if you moved those IBM shares into a joint brokerage account you hold with your spouse and then sold them and used that community property money to buy Apple shares, you have now, in legal terms, tainted the separate property, says Rosenhouse. The new stock purchase has in effect become community property.
"The best thing to do if you want to maintain separate property is to maintain separate property," says Rosenhouse.
That's not always easy to do, but you can help preserve an asset's separate status by keeping good records, says Leslie Dawson, CPA and partner at Glenn Dawson and Burak LLP in Walnut Creek, Calif. The documentation must be very good, says Dawson, because courts and laws favor equal ownership. "If there's any doubt, the community wins," she says.
Or you could have a prenuptial or postnuptial agreement in which both spouses specifically agree that assets that otherwise would be considered community property are separately owned by one or the other.
Uncommon, but possibly costly, tax effects
When it comes to taxes, a happily married couple in every state probably files a joint tax return. Joint filing typically produces a better tax outcome for the couples, and community property laws aren't a factor with joint filings.
If, however, you and your spouse decide to submit separate Form 1040s, look out.
"Filing separately is a miserable way to file," says Dawson, "and it's more miserable in a community property state."