Is an Inheritance Considered Community Property?

Separate property becoming community property

If you inherit something and then blend it with your spouse's possessions, you risk losing that separate identity of your inheritance. A divorce could split it in half as community property.

• Property received separately as a gift or inheritance during a marriage is generally considered separate property, not community property.
• Separate property can lose its character if commingled with community property to the extent that it's impossible to trace or distinguish separate property from community property.
• Examples of commingling include depositing inherited funds into a joint account or using them to pay community expenses, such as a mortgage or home improvements.
• Courts often require tracing to determine the extent of commingling; if that is not possible, courts may presume the property is community property.

These principles and examples are detailed in the IRS Publication 555 - Community Property (2024). 

What is "commingling" of assets?

Commingling is the mixing of inheritance with marital assets or its use for joint expenditures, thereby converting a clearly separate inheritance into community property and affecting ownership and division rights. This mixing can lead to complications because it makes it hard to tell which property belongs to whom.

Some examples of commingling in the context of inheritance include the following.

1. Depositing the inheritance money into a joint bank account

If inherited funds, which are separate property, are deposited into a bank account shared with a spouse and used for joint expenses, the money can be considered commingled community property. Spouses may treat the entire account as marital property.

2. Using inherited funds to pay for joint expenses

Using inheritance money to pay the mortgage, utilities, or other community expenses on a home that is community property can blur the lines and create community property interests in what was originally a separate asset.

3. Doing renovations on a community property house

Spending inherited money to improve or renovate a jointly owned house, which is community property, may increase the home's value attributable to community funds. The inheritance converts part of its value into community property. 

What is transmutation?

Transmutation is the formal legal process that changes property from separate property to community property or vice versa. It can also refer to converting a property from one spouse's separate property to the other's. For instance, by intentionally changing the property's character through a written agreement, such as adding a spouse's name to the property's title.

How does transmutation work?

Transmutation is a clear and intentional change in the legal ownership of a property. It requires an explicit written agreement between spouses and can’t happen accidentally, informally, or through casual agreements. Simply marking property as separate or community in a will or trust does not count as transmutation unless there is specific written language evidencing the intent to change the character of the property

For instance, when you add a spouse's name to the deed of inherited property, you convert that separate property into community property. The process of transmutation safeguards against surprise or unintentional transfer, as a property's character can't change without full disclosure and mutual consent, typically in writing.

Transmutation significantly affects how property is divided during a divorce or upon the death of a spouse, as spouses typically divide only community property.

California Family Code § 852 provides that a transmutation must include an "express declaration" in writing that explicitly states the change of character and acknowledges the transfer.

• Suppose a spouse is willing to have their separate property converted to their spouse's personal property. In that case, valid transmutation documents must be acknowledged and accepted by the spouse relinquishing their interest in the property.
• Adding a spouse's name to the deed of an inherited house, combined with a signed written agreement, may change the type of the inherited property from one spouse's separate property (inherited) to community property owned equally by both spouses.
• Signing a formal postnuptial agreement may also convert assets from separate to community forms.

State-based specifics of community and separate property

While community property rules apply uniformly in certain states, the distinction between community and separate property hinges on how and when assets are acquired. Let’s break it down by state first.

Which are the community property states?

• As of 2026, the nine community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
• In these states, most assets and debts acquired during marriage are owned equally by both spouses, regardless of whose name is on the title.
• However, property inherited by one spouse, such as a house from a parent, remains that spouse's separate property unless it's commingled with community assets.
• Alaska, Florida, Kentucky, South Dakota, and Tennessee allow couples to opt in to community property rules; however, by default, these states are not considered community property states.

What are the tax considerations when dealing with inheritance and community property?

Federal and state inheritance taxes may apply, depending on the jurisdiction and the value of the estate. IRS Publication 555 provides detailed explanations of these issues.

• Community property laws affect basic step-up rules for inherited property.
• Taxation issues may arise when you commingle inherited assets, which can impact capital gains taxes when the spouses sell the property.

What are equitable distribution states?

An equitable distribution state is another name for a common-law state, which includes all states except the previously listed nine community property states.

In equitable states, property acquired during the marriage is divided upon divorce, but that may not necessarily mean it’s split equally. Courts consider numerous factors to determine what is equitable for both spouses. It could mean a 60/40 or 70/30 split based on the circumstances. 

In states that follow equitable distribution, an inheritance remains separate property of the spouse who obtained it.

How is property divided in equitable states?

Generally, to divide property in equitable states, the court looks at state-specific factors, such as:

• The length of the marriage and the age, health, and earning capacity of each spouse
• The contributions of each spouse (including non-financial, like homemaking)
• The economic circumstances, such as loss of health insurance benefits after divorce
• Any dissipation or waste of marital assets while the divorce was still ongoing
• The tax consequences to each spouse

For instance, in New York, the court considers 15 factors in determining the equitable distribution of property.

Courts carefully evaluate and appraise all assets and debts, aiming for a just outcome tailored to the unique circumstances of the marriage.