If you have rental income from a separate property and you’re residing in California, then that income is considered separate property as well. But if you want to keep it separate, you gotta follow all the rules.
This is a tricky topic and if you have any serious inquiries, I suggest you see an attorney in your state. I did my internet research to figure out the nuances of this topic, but actions taken may have long term ramifications.
Marriage and Property
As i’m about to get married in NY this summer, I was chatting with my sister and she was talking about different state rules for divorce and protecting assets. She is in California and I’m getting married in New York, so I started to do some research. Not to sure how my finace will feel, but she knows I write a personal finance blog and I also know she doesn’t read it. 🤣
Where You Get Divorced Matters
#1: Where you get divorced is what matters rather then where you get married! The state laws that apply is where you get divorced and each state generally has different rules for divorce, child custody, child support, and alimony. Where you get divorced is where you have residency. If you and your spouse are living in different states, then this could get tricky and usually it comes down to who files first in their perspective state.
Community Property States
California is a community property state, which means that property acquired during your marriage is considered community property, with the exception of gifts and inheritances. Property acquired before or after your marriage is considered separate property. If you get divorced in California, then community property is split 50/50. I found this page is a great resource for specifically for California
#2 Not all community property states are the same! Both California and Texas are community property states. California considers rental income from separate property as separate property. Texas considers this rental income as community property! California also considers most income derived from separate property as separate property, such as stock dividend from stocks owned prior to marriage. Texas considers all income during marriage as community property.
#3 The appreciation on your separate property is considered separate property. If your home goes up in value, then that’s all yours. If you sell your separate property, then that’s all yours too.
Keeping Your Rental Property Separate
If you have a rental property separately owned before marriage, you may want to keep it as separate. You don’t want your separate property “commingling” with your community property. Commingling is the process of mixing assets of different accounts making it indiscernible to which part is separate vs community. When this happens, commingled property is considered community property and split 50/50. Here’s some guidelines to help prevent this:
- Keep a separate bank account for this property’s transactions.
- Don’t have the income go into a joint account.
- Don’t put your spouses’ name on this account.
- Don’t put your spouses’ name on the property title.
- Don’t pay for repairs with community money or account.
- Use your separate account or separate money to pay for anything that this property needs.
- Using community money will be commingling of properties.
- Don’t pay for repairs, renovation, the mortgage, or anything with community money
- Bullet proofing your separate property.
- As mentioned above, some states consider income derived from separate property as community property. So you may want to deposit rental income into a completely separate checking account. If you get divorced in California, then this account is yours, but if you’re in Texas, then this account will be community.
- Get a prenup or postnup. This is probably the most clear cut way to draw the line, but some people are very against the idea of having this. As a saavy financial planner, this is a good option.
Try Not To Get Divorced
This isn’t feasible to everyone, but not getting divorced is best for your personal finances. Divorce can be petty, ugly, and many times terrible for your wealth. As this is a personal finance blog, I recommend you avoid this.