Community or Separate Property For RDPs
Understanding the division of community property and separate property for registered domestic partners is important when it comes to filing taxes. The information provided here will help you determine which of your assets are jointly owned for tax purposes.
IRS Publication 555 provides the following guidance for determining what property is community and which is separate property:
Community Property is Property:
-
Acquired during registration while domiciled in a community property state. (Includes the part of property bought with community property funds if part was bought with community funds and part with separate funds.)
-
Property that the partners agreed to convert from separate to community property through an agreement valid under state law.
-
That cannot be identified as separate property.
Separate Property Is:
-
Property that was owned separately before registration.,
-
Money earned while domiciled in a non-community property state.
-
Property received as a gift or inherited separately during registration.
-
Property bought with separate funds, or exchanged for separate property, during registration.
-
Property that the partners agreed to convert from community to separate property through an agreement valid under state law.
-
The part of property bought with separate funds, if part was bought with community funds and part with separate funds.
However, notwithstanding the guidance above, a partner’s premarital separate property can become marital through transmutation or active appreciation.
-
Transmutation (a legal term) - occurs when RDPs demonstrate an intent, by virtue of their words and actions during the period of registration, to treat one partner’s separate property as joint property. (This action will require the filing of a federal gift tax return, if the annual gift tax exemption is exceeded.)
-
Active appreciation - occurs when both partners’ joint funds or joint efforts cause a partner’s separate property to increase in value during their period of registration.
Another issue that can affect the separate or community property status is prenuptial and postnuptial agreements.
Caution: These are legal documents and advice, and drafting should be left to those that are licensed to practice law. Generally, five elements are required for a valid prenuptial agreement:
-
The agreement must be in writing.
-
It must be executed voluntarily.
-
There must be full and/or fair disclosure at the time of execution.
-
The agreement cannot be unconscionable.
-
It must be executed by both parties (not their attorneys) in the manner required for a deed to be recorded, known as an acknowledgment, before a notary public.
Ending the Community – To end a community in California does not necessarily require the couple to be legally separated or have filed for separation or divorce. The community ends when the couple separates with no intention of reuniting and is based upon the “facts and circumstances” of the situation.
Living Under the Same Roof - On July 25, 2016, Governor Brown signed SB 1255, which reverses a California
Supreme Court ruling (Davis 2/20/15), and effective January 1, 2017, defines the date of separation so that taxpayers may “separate” while continuing to live under the same roof. CAUTION: this law does not change the “lived apart” rule for someone still married to claim head of household filing status. The following is an excerpt from the Internal Revenue Manual:
“ IRM 25.18.1.3.4.5 - Physical Separation (03-04-2011) - California and Washington hold that the community property estate is terminated when spouses physically separate and both spouses intend to permanently end the marriage. This mutual intent must be established through the actions and conduct of the spouses. This requires an examination of the facts and circumstances of each case, with the burden of proof on the party asserting that the community property estate was terminated. Siezer v. Sessions, 132 Wash. 2d 642, 940 P.2d 261 (1997), citing Wash. Rev. Code § 26.16.140; In re Marriage of Hardin, 38 Cal. App. 4th 448, 45 Cal. Reptr. 2d 308 (Ct. App. 1995), citing Cal. Fam. Code § 771. In these states, the Service should continue to apply community property laws to separated spouses unless both spouses have affirmatively alleged that they do not intend to resume the marriage and community property rules do not apply, and their conduct supports this. ”
-
If the clients do not have a written affirmation of separation or a legal state termination of the relationship, then this is where you should suggest the partners consult with an attorney to draw up a written document meeting the IRM’s requirements.