Yours, mine, and ours: how California community property laws work

Whether you’re thinking about getting married, you’re already married, or (sorry!) you’re considering divorce, understanding community property laws could help you both protect yourselves and make better financial decisions—together.

California is a community property state. Community property laws apply to married couples and couples who choose to register with the state as domestic partners. These laws could affect how you share and divide your valuables and your debts as a couple. 

Here’s a basic introduction to how community property works in California.

The following is for informational purposes only and not to be construed as legal advice.

What is community property in California?

Community property means that both partners in a marriage own and share everything they acquire (earn, buy, or borrow) together. It doesn't matter who earned the money or who spent it. It all belongs to both of them. If they decide to get divorced or separate, a judge can make them split what they own and owe in a fair and equal way. 

What is separate property in California?

Property that isn’t community property is called separate property. It includes:

• Assets (things you own that have value) and debts that one partner owned before the marriage or acquired after separation 

• Gifts or inheritances either partner receives during the marriage

• Assets purchased with money owned individually by either spouse

• Assets defined as separate by a prenup or postnup agreement between both spouses. In general, these agreements override community property laws. 

Note that in California, you don’t have to go through a legal separation to stop new transactions from becoming community property or debt. Your separation just needs to be permanent. 

Community property cautions

Ordinary transactions could turn separate property into community property and vice versa, even unintentionally. Not only will this matter if you separate or divorce, it can impact your estate planning as well. 

There are four ways in which separate property can become community property.

• Transmutation. Both partners agree to an ownership transfer, typically via a written agreement. For instance, if one partner adds the other to the deed of a home they own separately, the home becomes community property.

• Commingling. Separate money gets mixed with other money until you can’t tell which is which. For example, although inheritances are separate property, if one spouse deposits an inheritance into a joint account, that money could become community property. 

• Community funds. When community money is used to pay for separate property, the asset could become community property. This might happen if, for instance, you own your car separately but pay your auto loan from a joint account.

• Community effort. Separate property could become community property if both partners contribute their efforts. This could happen if, for example, one spouse brings a business into the marriage and the other spouse works on it and increases its value. 

Community property laws could also affect the way you borrow. In community property states, government-backed mortgage programs like FHA loans require lenders to check the non-purchasing spouse’s credit history. 

Managing marital debt in California

How are marital debts treated in California? In California, debt responsibility depends on when you took on the debt, who took on the debt, and what the debt was for. If you have a mortgage on your marital home, for instance, that’s likely a community debt and belongs to you both. 

Credit card debt can be complicated. You might each have had credit cards in your name only when you entered the marriage. Balances that you each had before you got married could be considered separate property. But debt that you took on during the marriage and before you separated could belong to both of you. 

Managing debt together

Marriage isn’t just a romantic partnership. It’s a legal one. And in California, community property debt rules can get complicated. Your best bet is to keep good financial records and to be open about finances throughout your relationship. 

If you’re still looking forward to the big day, one thing that could help you get started on the right financial foot is for both of you to check your credit reports (get them at AnnualCreditReport.com). Review your credit reports and print your account statements before you get married, so you both know what your separate debts and assets are. This is also a great time to talk about how you’ll pay the bills and whether you’ll maintain separate bank accounts. 

Managing debt apart

Debt division in divorce, California style, isn’t always simple. If you end up in splitsville, you’re each going to own half of your community debt, and you’re both responsible for paying it.  

In a divorce, a judge may look at your joint debts and assign responsibility for various accounts to each of you. However, a divorce court can’t change the agreements between you and your creditors. Even if the judge says your ex is responsible for a debt, if your ex doesn’t pay, the creditor can come after you for the money. If your ex files for bankruptcy, expect joint creditors to pursue you for payment. Attorneys and financial advisors strongly recommend that you pay off joint debts before filing for divorce and take your individual debts with you when you move on. 

Protecting your assets in California

Not everyone loves community property laws. Fortunately, you can decide for yourselves exactly what you intend to be community property and what you want to remain separate property. 

A prenuptial or postnuptial agreement between both partners usually overrides community property laws. So you can decide in advance who gets what regardless of any accidental commingling. These documents can also help protect you against spousal debt in California. You can state in your document that individual debts taken during the marriage go with the partner who spent the money. 

It might be a good idea to keep your separate money separate. Insurance payouts, lawsuit awards, inheritance, gifts, and money that you owned before marriage shouldn’t be mixed with joint money or spent on a joint asset unless you intend to turn that money into community property. 

Budgeting is also helpful. Look at what your individual and joint needs are and include them in your joint budget—payment amount, source of the money, and who’s responsible. Many couples create a joint account for joint expenses and maintain individual accounts for their private matters. Consider determining what percentage of joint costs you’ll each assume if your earnings are unequal.

Finally, be open about your individual finances. Have a money conversation at least once a month in which you check your budget and go through your statements and your credit reports. It’s easy and free to review your credit reports and check your scores, so make this part of your routine financial checkup.