Community and Common Law Property – Boulder Real Estate Agent
This article discusses legal and tax principals but in no way constitutes legal advice. It is intended only as general information for use by Colorado real estate agents, prospective clients and members of the general public looking to gain a better understanding of the implications of moving to Colorado from a community property state or territory. For specific advice tailored to your circumstances, you will need to speak with an attorney.
Common Law Property
Most states, including Colorado, are known as common law states with regard to how property (whether movable property, financial assets or real estate) is treated upon the dissolution of marriage (by death or divorce). In common law property states any assets and debts acquired during a marriage are the rights and obligations of the spouse that purchased or received them, unless specifically stated otherwise on a legal document such as a deed, motor vehicle title, bank account designation form, etc.
For example, let’s say a spouse purchases real estate in Gold Hill, Colorado using a loan in the purchasing spouse’s name only and cash from a bank account that is used to hold funds from the purchasing spouse’s monthly payroll and held in the name of the purchasing spouse only. The purchasing spouse would own the real estate separately from the non-purchasing spouse (the real estate would be deemed “separate property” upon dissolution of marriage) and the non-purchasing spouse would not be entitled to any interest in the real estate.
A handful of states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin) and Puerto Rico use the community property approach. Tennessee and Alaska are mostly common law property states but allow for the opting-in to the community property approach. In community property states each spouse is vested with an undivided one-half interest in all property acquired during marriage, regardless how the property is titled, unless such property was acquired by gift, devise or descent (e.g., inheritance).
For example, let’s say a spouse purchases real estate in Palo Alto, California while married and residing in California and only the purchasing spouse’s name is listed as the “grantee” on the deed. Despite only one spouse being named as an owner according to the deed, because the property was acquired during the marriage and the couple resides in California (a community property state) both spouses are vested with an undivided one-half interest in the property.
The application of the concepts of community property and common law property become interesting when people move from a community property state to a common law property state or vice-versa. The designation of property, or even proceeds from the sale of property (including real estate), does not change simply by the fact of a married couple moving from a community property state (e.g., California) to a common law property state (e.g., Colorado). This can become an important issue, particularly for estate planning purposes, because under 26 U.S.C. § 1014(b)(6), a “stepped-up basis” is applied to the entire, 100% interest in community property “held by the decedent and the surviving spouse under the community property laws of any State, or possession of the United States or any foreign county.” The same is not for true for property deemed common law property, for which generally only 50% of the interest would receive a stepped-up basis upon the death of a spouse, if the deceased spouse’s name was listed as one of two “grantees” on the deed. The implications of this rule is that, when one spouse dies and the property is owned as community property, the “basis” for calculating capital gains taxes “steps up,” for the entire property, to the fair market value of the property as of the date of death of the deceased spouse, potentially resulting in a reduced capital gains tax burden.
The rules related to stepped-up bases and community property are complex. If you are moving to Colorado from a community property state, Puerto Rico, or a foreign county that uses the community property approach, and are interested in keeping the community property designation of the assets used to purchase your Colorado property, speak with an estate planning attorney familiar with these complex rules. As your Boulder real estate broker, Ashley Newell at Royal Arch Real Estate can work with you and your attorney to help assure you are taking advantage of any tax benefits you have acquired by virtue of previously living in a community property state.
If you are looking for a Boulder real estate agent with a results oriented approach tailored to your specific needs, contact Royal Arch Real Estate. We are knowledgeable and experienced brokers who always have your best interests at the forefront of our minds, whether you are buying or selling a home, vacant land or a new construction.