During the divorce process, the courts will help you decide how assets and debts will be divided between you and your spouse, both real property, like your house, and personal property, like your cars and furniture. This is a "property division order." One of the most important things to know when it comes to dividing up the assets of a marriage is knowing whether you live in a ''community property'' or an ''equitable distribution'' state.

In either scheme, there a number of factors and variables that effect a division of property, which are usually set out in detail in the various states' divorce laws. So, if you're involved in a divorce, it is critical that you understand the property division laws in your state and the court decisions interpreting those laws or consult an experienced divorce attorney.

Community Property States

Community Property

Community property is all property jointly owned by the spouses or acquired during marriage by the labor, efforts, or skill of either or both spouses. However, careful records and the way title is held on property can refute the assumption that all property acquired during the marriage is community property.

Separate Property

Property "owned" by only one spouse usually won't be part of the property division in the divorce. Cars, boats and houses that have only the name of one spouse on them may be considered the separate property of that spouse.

Separate property typically includes:
  • Property that was bought or acquired by one spouse before the marriage
  • Property that was inherited by one spouse or was a gift to one spouse, even if the inheritance or gift happened during the marriage
  • Businesses owned prior to marriage or living together
  • Pension proceeds of either spouse that vested prior to marriage

Community Property v. Separate Property

In some states, there is a presumption that property acquired during marriage by either husband or wife or both is community property. In other states, property in the possession of either spouse during the marriage is presumed to be community property, and the spouse who claims that such property is "separate property" has the burden of proving it.

Just as there are ways to get around the assumption that something is community property, there are ways to get around the assumption that something is separate property.

Personal gifts given at Christmas, anniversaries, etc., are assumed to be the property of the spouse who received the gift, but if a woman's husband gives her an expensive necklace that is treated by the couple as more of a jointly owned investment than part of her personal wardrobe, the necklace might be community property.

It is, therefore, important to document the circumstances under which all valuables were acquired, even up to the date that your divorce is final, because often all property acquired up to the date of divorce will be treated as community property. However, some laws use the date of separation as the cut-off date for determining if certain property is community or separate property.

Commingling

Sometimes, separate property can become community property through "commingling," which is when separate property is mixed together with community property in such a way that you can't tell the difference between the separate and the community property. For example, commingling might occur where money given to one spouse as a gift is deposited into a bank account jointly owned by both spouses and then used to buy community property, like home furnishings.

Dividing the Property

Most community property states allow the court to make an "equitable" division of community property, that is, a property distribution that is "fair" to both spouses. In these states, the courts will consider various factors when making the division, such as each spouse's current income and future earning capacity. Some, but not all, will consider a spouse's fault in causing the divorce or misconduct or fraud in dealing with the parties property or assets during the marriage.

You need to carefully read the community property laws in your area to determine if an "equal" or an "equitable" distribution will be made in your case, and if your separate property can be included in the property distribution.

Although each spouse is entitled to half of the assets, the form may differ. For example, there is no way for you to split your home physically in half. You may be required to sell your home and split the proceeds or the spouse that wishes to stay in the home may have to buy out the one who does not.

Equitable Distribution States

If you do not live in a community property state, the courts will follow a model of equitable distribution. Equitable distribution does not divide assets evenly but instead divides assets according to what is deemed fair to both spouses.

In deciding what's "equitable," a court will commonly take into account:
  • The length of the marriage
  • The work history, earning capacity and job prospects of each spouse
  • The physical and mental health of each spouse
  • The source of particular assets
  • Expenses and needs of the children

Taking A Property Inventory

Regardless of your state's laws, it is always important to keep good records and to document everything that you can. As soon as possible, get your attorney a list of all assets and any supporting documentation that may be required, including copies of title, written agreements, and current appraisals.

It's very important that you make a complete list of all property belonging to both you and your spouse. It's vital not to hide assets, because anything left out of the property settlement will have to be dealt with later.

Many lawyers have property checklists designed to jog your memory regarding property you may have forgotten about.

Assets which people sometimes forget to list include:
  • Pension and retirement accounts
  • IRAs
  • Stocks and bonds
  • Certificates of Deposit
  • Money Market Accounts
  • Items from your safety deposit box

Valuing Assets

When you and your spouse can't agree on the value of a particular piece of property, it may be necessary to have a professional appraiser -- such as a real estate broker -- put a value on the property for you. You'll want to provide your lawyer with any information you have regarding the value of property, including prior appraisals and assessments from tax collectors and so forth.

Many divorcing couples make the mistake of fixating on one piece of personal property, such as an art object or something else of sentimental value, and spending many times the value of the object in arguing over who will own it. It's almost always better to compromise between the two of you as to how to divide your personal household possessions, unless your lawyer finds some reason to get involved.

Tax Considerations

Generally, there is no gain or loss for federal income tax purposes on the transfer of property between spouses when the it is "incident to the divorce," which means that the transfer:

  • Occurs within one year after the date on which the marriage ceases, or
  • Is related to the end or cessation of the marriage

A transfer is ''related to the cessation of the marriage'' only if:

  • It is made pursuant to the divorce or separation instrument, including any modification of or amendment to such an instrument, and
  • It occurs not more than six years after the date on which the marriage ceases

Any transfer that is not pursuant to a divorce or separation instrument, or any transfer that occurs more than six years after the cessation of the marriage, is presumed not to be related to the cessation of the marriage and might be taxable.

Nonetheless, you'll want to consult with a tax lawyer or certified public accountant regarding any possible tax consequences of holding, transferring or selling property as part of the divorce process.

Property Settlement Agreements

If you and your spouse can agree on how to divide your assets, whether it follows your state's guidelines or not, your lawyers will write up a formal agreement called a ''property settlement agreement'' or ''separation agreement.'' Detailed lists of who gets what will be included in this agreement.

Read the property settlement agreement carefully, and ask your lawyer about anything you don't understand. Once you've signed the agreement and it's been approved by the court, it will be difficult and expensive to change.

Following Through After the Divorce

As soon as the property settlement is approved or the court finalizes the divorce, you'll want to take care of the details of property transfer:
  • Get your ex-spouse's signature on any deeds, stock transfers or bank account forms that will be necessary to transfer property into your name
  • Make any payments necessary to fulfill your end of the property division arrangement
  • Start the process of refinancing property if that is a part of your agreement
  • Make sure you release your name on the title to any property your ex-spouse is receiving

While it may be the last thing you want to do, taking care of these details will save future trouble and make it easier to gain closure on this chapter of your life.

Questions for Your Attorney

  • How do I get an appraiser when my spouse and I can't agree on the value of something?
  • Are we in a community property state?
  • If we were married in, lived in, and divorced in this state, but we have property in another state, which state's property division laws apply to the out-of-state property?
  • What can I do if my ex-spouse refuses to sign over to me the deed to a house that the court awarded to me in our property division?
  • What are the tax consequences of the division of assets?
  • Just before we got married, my wife's father gave her some money, which we used as part of our down-payment for our house. I provided the other part of the down-payment, which was much larger. How will the house be divided when we get divorced?
  • What kind of records do I need to prove that some property that my spouse claims is community property is really my separate property?

Tagged as: Family Law, Divorce, assets division, divorce assets