How community property works
Nine states follow community property rules: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. What counts is where a couple is domiciled, meaning their permanent home, not where they own property or where one spouse works. Three of them, Nevada, Texas and Washington, also levy no broad state income tax on wages in 2026, though Washington’s 9.9% tax on income over $1 million starts in 2028. The other 41 states use common-law rules, under which each spouse owns what they earn and what is titled in their name.
In the community property states, wages, business profits and property acquired by either spouse during the marriage are community property, owned half by each. Separate property belongs to one spouse alone: what they owned before the marriage, gifts and inheritances received individually, property bought with separate funds, money earned while living in a non-community state, and property the couple converted to separate status by a valid agreement. Anything that cannot be traced back to a separate source is generally presumed to be community.
Income from separate property splits the states into two groups. Arizona, California, Nevada, New Mexico and Washington treat it as separate income. Idaho, Louisiana, Texas and Wisconsin treat most of it as community income, so dividends on an inheritance can become half the other spouse’s.
Community property and income taxes
On a joint return the rules barely matter, since both spouses’ income is combined anyway, but they matter a great deal for married filing separately. Each spouse must report half of all community income, such as wages, self-employment profit, and interest, dividends and rent from community property, plus all of their own separate income, and each claims half the income tax withheld on community wages. Both returns attach Form 8958 to show the split.
Several items do not split. Taxable IRA distributions are taxed entirely to the spouse named on the account, because IRAs are by law deemed separate property. Social Security benefits are income of the spouse who receives them. Pension payments are divided according to how much of the service happened while the couple was married and living in a community property state.
Spouses who lived apart all year, did not file jointly and did not transfer earned income between them report earned income as the income of the spouse who earned it. Registered domestic partners in California, Nevada and Washington must also split community income on their federal returns, even though they are not married for federal tax purposes. Couples paying estimated taxes separately figure them on half the community income plus their own separate income.
The double step-up in basis at death
The biggest planning payoff comes when the first spouse dies. Inherited property normally gets a step-up in basis to its value at death, which erases the built-in capital gain. For couples in most states, that applies only to the half of jointly owned property included in the deceased spouse’s estate. The survivor’s own half keeps its original cost basis.
Community property is treated more generously. Under section 1014(b)(6) of the tax code, the survivor’s half of community property also takes a new basis equal to its value at death, as long as at least half of the community interest is included in the decedent’s gross estate. The whole asset starts fresh, so a survivor can sell appreciated stock, a rental or the family home with little or no taxable gain. Registered domestic partners do not get this treatment.
The step-up works in both directions. An asset worth less than its purchase price steps down on both halves, and the loss disappears. Pre-tax money in IRAs and 401(k)s gets no step-up at all, since it is taxed as ordinary income when withdrawn. The reset gives survivors room to rebalance, which can partly offset the higher taxes of single filing known as the widow’s penalty.
Divorce, estates and retirement accounts
In a divorce, state law decides how community property is divided, and for federal tax the division creates no taxable gain or loss, whether it is equal or not.
At death, each spouse owns half of the community property, so only the decedent’s half is in their gross estate for estate tax purposes, and that is generally the only half they can leave by Will. Transfers to a surviving spouse who is a US citizen qualify for the unlimited marital deduction, so estate tax is rarely owed at the first death.
Retirement accounts follow partly different rules. For most 401(k) plans, federal law makes the surviving spouse the beneficiary unless that spouse consents in writing to another beneficiary designation, regardless of state property law. IRAs are not covered by that federal spousal rule, so community property law can give a spouse a claim to an IRA funded with earnings from the marriage. Naming someone other than a spouse on such an account, or moving between community and common-law states, is a reason to review the plan with an estate planning attorney.
Illustrative numbers
A $1.2 million brokerage account after the first spouse dies
- Value at death
- Fair market value on the date of death, or on the alternate valuation date if the estate elects it
- Original basis
- What the couple paid for the asset, adjusted for improvements and depreciation
The community rule needs at least half of the community interest in the decedent’s gross estate and does not apply to registered domestic partners.
Couple’s original cost basis in the account$400,000
Value on the date of the first death$1,200,000
Survivor’s new basis as community property$1,200,000
Survivor’s new basis as joint tenants in a common-law state$800,000 ($600,000 stepped-up half + $200,000 original half)
Taxable gain if the survivor sells for $1,200,000$0 vs. $400,000
Federal tax on that gain at the 15% rate$0 vs. $60,000
Same account, same sale, very different bills: the community property survivor owes nothing on the growth built up during the marriage, while the common-law survivor owes about $60,000 of long-term capital gains tax before any net investment income tax or state tax.
At a glance
How common items are classified in the nine community property states
| Item | Treatment |
|---|---|
| Wages and business profit earned while married and domiciled in the state | Community: half belongs to each spouse |
| Property owned before the marriage | Separate |
| Gifts and inheritances received by one spouse | Separate |
| Property bought with separate funds, or converted by a valid agreement | Separate |
| Interest, dividends and rent from community property | Community |
| Income from separate property | Separate in AZ, CA, NV, NM and WA; mostly community in ID, LA, TX and WI |
| Taxable IRA distributions | Taxed to the spouse named on the account |
| Social Security benefits | Income of the spouse who receives them |
Put it in your plan
Community Property in MoneyWhatIf
When a couple’s plan files separately in one of the nine community property states, MoneyWhatIf splits earned income, interest, dividends and rent evenly between the two returns, while IRA and pension distributions and Social Security stay with the person paid. A couple who lived apart all year is not split. Separate property cannot be tagged, so everything else held is treated as community. At a death, taxable-account and property basis follow ownership and the modeled step-up rules. Separately, the Estate page’s estimate of what heirs receive has a Yes/No stepped-up basis switch.
Common questions
Community Property FAQs
Which states are community property states?
Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. Alaska, South Dakota and Tennessee also let couples choose community property treatment by election, though the IRS’s community property publication does not address how those elections work for federal tax.
Is an inheritance community property?
No. A gift or inheritance received by one spouse is that spouse’s separate property, even during the marriage. Two things can change the picture: in Idaho, Louisiana, Texas and Wisconsin, most income the inheritance earns is community income, and mixing the money into joint accounts can make it impossible to trace, in which case it may be treated as community property.
Do community property rules matter if we file a joint return?
For the income tax itself, mostly not, because a joint return combines both spouses’ income anyway. The rules still govern who owns what, how property divides in a divorce, what each spouse can leave by will, the basis reset at a death and any year you file separately, when each spouse reports half of the community income.
Does community property mean a 50/50 split in divorce?
Not always. Each spouse owns half of the community property during the marriage, but the final division in a divorce is set by each state’s law and the court, and it is not always exactly equal. For federal tax, the division creates no taxable gain or loss, whether it is equal or not.