How to Know if Something is Community Property or Sole and Separate Property
During a divorce, figuring out if something is community property or sole and separate property is typically pretty simple. However, some property can be hard to classify. The following questions can help determine if an asset is part of the marital community or owned solely by one spouse.
1. When was the property acquired?
This is generally the key question for every piece of property. A basic tenet of community property law is that property acquires its status as community or separate at the time of its acquisition. Lawson v. Ridgeway, 72 Ariz. 253 (1951). The law in this regard is simple:
- If it was acquired during the marriage, the presumption is that it is community property. See R.S. § 25-211(A).
- If it was acquired before the marriage or after the date a divorce petition was served on the responding party, the presumption is that it’s separate property. See R.S. § 25-213.
The “presumption” concept can introduce complexities into the analysis. This is a gray area because with only limited information, the analysis is not complete. Other factors might change whether the property is considered community or separate.
2. Was the property acquired by gift or inheritance?
If the property in question was gifted or inherited, then it is not community property, even if it was acquired during the marriage. Such property can become community property if it is not kept separate from the other community property.
(Technically, the law says “by gift, devise, or descent,” but the only difference between the “devise or descent” is whether the property received was inherited through a will or not, so to simplify, the more familiar term “inherit” was used.)
3. For real property (i.e., your house or other real estate), did both parties sign the contract? Did either party sign a disclaimer deed or a quitclaim deed?
Under A.R.S. § 25-214(C), either spouse may acquire, manage, control, or dispose of community property, except for certain transactions that require both spouses’ signatures to become community property. Most commonly, this occurs when a married couple finances a home in one spouse’s name alone. In that situation, the spouse who is not part of the mortgage may end up signing a disclaimer deed that forfeits their ownership interest in the house. But even though the house is owned by only one spouse, the other will still be entitled to some of the proceeds of the house through what is called a community lien. See Drahos Calculation.
The other, less common situations in A.R.S. § 25-214(C) that require both parties’ signatures to become community property include a guaranty, surety, or indemnity contract. For simplicity’s sake, think of a guarantor or surety as a co-signer. An agreement to indemnify is where a spouse promises to another person or entity: If you get sued, I will make you whole.
4. Was the sole and separate property kept separate from community property, or was it commingled?
Commingling occurs when separate property and community property are mixed together. When funds become commingled, there is a presumption that the whole account is community property. For example, let’s say a wife inherits $20,000 from her aunt. When she receives the money, it is her sole and separate property. But she then deposits the inheritance into a joint account where her and her husband’s paychecks are deposited. At this point, the property is commingled and presumed to be community property.
Commingling cannot happen with real property. As the Arizona Court of Appeals wrote, “You cannot mix Black Acre with White Acre and obtain Gray Acre.” Potthoff v. Potthoff, 128 Ariz. 557, 562 (App. 1981). Separate real property remains separate so long as the other spouse’s name is not added to the deed.
5. If commingled, can the property be separated?
The legal process of identifying separate property within commingled assets is called tracing. If the property can be traced, the property can remain separate. But when it becomes impossible to tell what part of the property is community and what part is separate, you cannot make a good-faith argument to trace portions of it.
Tracing can become impossible when there are hundreds or thousands of transactions to account for. Using the inheritance example from the previous question, after the wife deposits her $20,000 inheritance into their joint account, both she and her husband deposit their paychecks into that account, they pay their monthly bills from it, and they use it to pay for vacations, groceries, gas, etc. Between the time of the inheritance and the divorce, they may have hundreds, if not thousands, of transactions going in and out of that account. That makes it impossible to trace because you cannot identify what money went where. Since the inheritance was commingled, the entire account is considered community property.
In comparison, let’s say the wife deposited her $20,000 inheritance into a joint money market account with her husband. Then, they made three deposits of community funds totaling $6,000, and the husband made a withdrawal of $3,000. While there may be an argument over whether the husband was withdrawing the wife’s inherited funds or community funds, at the very least, we can trace out $17,000 of the wife’s inheritance as sole and separate property.
6. Is there a prenuptial or postnuptial agreement?
Prenuptial and postnuptial agreements can allow a married couple to decide whether something is community property or separate property. Arizona law allows spouses to opt out of the community property laws for part or all of their property through a prenuptial (before the marriage) or postnuptial agreement (during the marriage). As long as the Agreement itself is valid and not unconscionable, any property described in that Agreement will be divided in accordance with the Agreement.
During the divorce, couples can also decide how to classify their property with a Separation Agreement or Rule 69 Agreement.
Related Pages and Posts:
Sole and Separate Property – Legal Definition
Community Property – Legal Definition
