Idaho Lottery Winner Tripped Up by Community Property Rules, May Lose Half

Idaho lottery - lottery community propertyWhen Holly Lahti found out last week that she won half of the largest lottery drawing in U.S. history -- $380 million -- her elation may have turned to regret over two factors: She lives in Idaho and had not yet obtained a legal separation or divorce from her spouse.

Idaho -- like Arizona, California, Louisiana, New Mexico, Texas, Washington or Wisconsin -- is a community property state. This means all income and property, such as lottery winnings, acquired during the marriage (other than through inheritance or by gift in most of these states) are viewed as community property; each spouse is treated as owning half of the income and the property.

Lahti's estranged spouse, Josh, likely will be able to collect half of Holly's winnings of $190 million. She may contest this, but without a formal separation, she faces considerable legal difficulties. Living apart, no matter how long, does not create a legal separation. Whether a court viewing a claim by Josh to half her winnings will take into account her claims of domestic abuse at Josh's hands remains to be seen.All community property income is reported on a couple's joint tax return. If the spouses file separately, each spouse reports half of the combined community property income and gains from sales of community property, even though only one spouse actually earned it or had title to the property; each spouse can claim half of the deductions related to community property.

Consider Holly's situation as a warning: Find out more about income tax rules for couples in community property states in IRS Publication 555, Community Property. And prepare financially if you're heading for a divorce, as our sister site DailyFinance points out in its series covering topics such as appraising your assets and determining your post-divorce expenses.

After tax, Holly's half amounts to an estimated $90 million, which she probably will have to share with Josh. She could avoid a court case by making some settlement with Josh, if he's willing to take it. If not, perhaps the biggest winner of the lottery proceeds may be their respective lawyers.
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