End of the Community(p8)

The marital community may end in several ways. When the marital community ends, the community assets (money and property) are divided between the spouses. Similarly, a same-sex couple's community may end in several ways and the community assets must be divided between the RDPs or California same-sex spouses.

If you own community property and your spouse dies, the total fair market value (FMV) of the community property, including the part that belongs to you, generally becomes the basis of the entire property. For this rule to apply, at least half the value of the community property interest must be includible in your spouse's gross estate, whether or not the estate must file a return (this rule does not apply to RDPs and individuals married to a same-sex spouse in California).

For example, Bob and Ann owned community property that had a basis of $80,000. When Bob died, his and Ann's community property had an FMV of $100,000. One-half of the FMV of their community interest was includible in Bob's estate. The basis of Ann's half of the property is $50,000 after Bob died (half of the $100,000 FMV). The basis of the other half to Bob's heirs is also $50,000.

For more information about the basis of assets, see Publication 551, Basis of Assets.

If spouses divorce or separate, the (equal or unequal) division of community property in connection with the divorce or property settlement does not result in a gain or loss (this rule does not apply to RDPs or same-sex married couples in California). For information on the tax consequences of the division of property under a property settlement or divorce decree, see Publication 504.

Each spouse (or RDP/California same-sex spouse) is taxed on half the community income for the part of the year before the community ends. However, see Spouses living apart all year, earlier. Any income received after the community ends is separate income. This separate income is taxable only to the spouse (or RDP/California same-sex spouse) to whom it belongs.

An absolute decree of divorce or annulment ends the marital community in all community property states. A decree of annulment, even though it holds that no valid marriage ever existed, usually does not nullify community property rights arising during the "marriage." However, you should check your state law for exceptions.

A decree of legal separation or of separate maintenance may or may not end the marital community. The court issuing the decree may terminate the marital community and divide the property between the spouses.

A separation agreement may divide the community property between you and your spouse. It may provide that this property, along with future earnings and property acquired, will be separate property. This agreement may end the community.

In some states, the marital community ends when the spouses permanently separate, even if there is no formal agreement. Check your state law.

If you are an RDP or an individual married to a same-sex individual in California, you should check your state law to determine when the community ends.