If an elderly Virginia homeowner rolls a retirement distribution into another retirement account, does that money count as income for their property tax relief?

Plain-English summary

Virginia's localities can offer an elderly-and-disabled property tax break (the "tax relief program") to homeowners whose combined household income falls below a locality-set threshold. The Loudoun County Commissioner of the Revenue asked: when an elderly homeowner takes a distribution out of an IRA or 401(k) and rolls it into another retirement account within the IRS 60-day window, does that distribution count as "income" for the property tax relief test?

The Attorney General said no. The Virginia statute, § 58.1-3211, defines income as money "available to meet expenses." A rollover that lands in another retirement account isn't available, by definition, because the IRS rules require it to go back into a retirement vehicle. Counting it as income would push otherwise-eligible elderly and disabled property owners out of the tax-relief program just because they moved money between retirement accounts.

The opinion also covers a subtler case: a distribution placed into an ordinary investment account that the taxpayer treats as a retirement account. The AG concluded that this also is not income under § 58.1-3211, so long as the funds genuinely are not available to meet expenses. The Commissioner of the Revenue makes that factual determination in each case.

Currency note

This opinion was issued in 2008. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here. The federal Internal Revenue Code provisions cited (26 U.S.C. § 408) have been amended several times since 2008, and Virginia property-tax statutes are routinely updated by the General Assembly.

Background and statutory framework

Section 58.1-3210 authorizes Virginia counties, cities, and towns to grant property-tax exemptions or deferrals to elderly (65 and older) and permanently disabled homeowners whose combined household income and net worth are below thresholds the locality sets. Section 58.1-3211 then defines the income test: localities count "total gross income from all sources, without regard to whether a tax return is actually filed," subject to specific carveouts (life insurance proceeds, borrowing).

A long line of Virginia AG opinions, going back to the 1973-1974 biennium and including ones cited in the 2008 opinion, has read "income" in this statute to mean money the taxpayer receives on a regular basis and has available to meet expenses, not the broader concept of "income" from federal tax law. The "available to meet expenses" gloss is the through-line that explains why a rollover does not count, money in a retirement account that just changed accounts is not available without triggering a taxable event.

The federal side of the analysis comes from the Internal Revenue Code: § 408(d)(1) ordinarily includes IRA distributions in gross income, but § 408(d)(3) carves out tax-free rollovers if the funds are returned to a qualifying retirement vehicle within 60 days. The AG borrowed the federal rollover concept to interpret the state property-tax statute, because both rules rest on the same underlying point, the taxpayer never had practical access to the money.

What the AG concluded, point by point

A distribution from a retirement account that is rolled into another retirement account is not income for § 58.1-3211 purposes. The federal 60-day rollover window is the touchstone: if the rollover satisfies the IRS test, Virginia commissioners of the revenue should treat the distribution as outside "total combined income" for purposes of property tax relief.

A distribution placed into an investment account that the taxpayer characterizes as a retirement account is also not income, when the funds are functionally inaccessible for daily expenses. The opinion is careful not to convert this into a self-serve label, the Commissioner of the Revenue still has to find as a factual matter that the money is being kept as retirement savings, not in a checking-equivalent vehicle the taxpayer can spend.

The AG acknowledged a 2006 opinion (2006 Op. Va. Att'y Gen. 199) that treated periodic and lump-sum retirement distributions as income, and reconciled it with this opinion: that earlier opinion did not address rollovers. A distribution withdrawn for daily living expenses is income. A distribution that flows from one retirement account into another is not. The dividing line is the "available to meet expenses" test.

What this meant at the time

For elderly or disabled Virginia homeowners (as of 2008)

If you take a distribution from an IRA or 401(k) and roll it over to another retirement account within 60 days, the Commissioner of the Revenue should not have counted that rollover against you on the tax relief application. Keep documentation of the rollover (the 1099-R, the receiving institution's deposit slip) so you can show the Commissioner the money went back into retirement, not into a regular spending account.

For Commissioners of the Revenue and county assessors (as of 2008)

The AG opinion gave you cover to exclude rollover distributions from the income calculation. It also reminded you that the determination is factual: a taxpayer's bare assertion that "I treat this account as my retirement fund" does not automatically exclude the distribution. You can ask for documentation, account-type information, and pattern-of-use evidence.

For tax and estate planning attorneys (as of 2008)

For clients on the borderline of property tax relief eligibility, this opinion confirmed that responsible rollover planning would not blow up their § 58.1-3211 qualification. The 2006 opinion treating distributions as income did not apply to true rollovers.

Common questions

Q: What counts as a "rollover" for this purpose?
A: The opinion follows the federal definition: a distribution placed back into an IRA, qualified retirement plan, or annuity within 60 days of receipt, with no more than one such rollover from the same account in a 12-month period (per 26 U.S.C. § 408(d)(3)(B)).

Q: If I take money from my IRA and deposit it in my regular savings account, is that a rollover?
A: No. That is a distribution available to meet expenses, and the AG opinion would not exclude it from income for the tax-relief calculation. The same opinion the AG cites for excluding rollovers (the 2006 opinion) treats regular distributions as income.

Q: What about a Roth conversion?
A: The 2008 opinion does not directly address Roth conversions. The underlying logic, money that stays in a retirement vehicle is not available to meet expenses, would point in the same direction, but anyone in that situation should verify with current Virginia tax guidance before relying on it.

Q: Does this also apply to required minimum distributions (RMDs)?
A: RMDs are by definition taken out of the retirement vehicle to meet the IRS minimum, so they generally are available to the taxpayer. The 2008 opinion's reasoning, "available to meet expenses," would suggest RMDs do count as income, but the opinion itself does not explicitly answer this point.

Citations and references

Statutes:

• Va. Code Ann. § 2.2-505
• Va. Code Ann. § 58.1-3210
• Va. Code Ann. § 58.1-3211
• 26 U.S.C. § 72 (annuities)
• 26 U.S.C. § 408(d)(1), (d)(3)(A), (d)(3)(A)(i), (d)(3)(B) (IRA distributions and rollovers)

Prior AG opinions referenced:

• 1992 Op. Va. Att'y Gen. 175 ("available to meet expenses" rule)
• 1987-1988 Op. Va. Att'y Gen. 527 ("income" given ordinary meaning)
• 1985-1986 Op. Va. Att'y Gen. 304
• 1981-1982 Op. Va. Att'y Gen. 354
• 1976-1977 Op. Va. Att'y Gen. 294
• 1973-1974 Op. Va. Att'y Gen. 401 (interpreting predecessor § 58-760.1)
• 2006 Op. Va. Att'y Gen. 199 (distributions as income)

Source

• Landing page: https://www.oag.state.va.us/annual-reports-opinions/official-opinions
• Original PDF: https://www.oag.state.va.us/files/Opinions/2008/08-066-Wertz.pdf

Original opinion text

COMMONWEALTH of VIRGINIA
Office of the Attorney General
Robert F. McDonnell, Attorney General

December 1, 2008

The Honorable Robert S. Wertz, Jr.
Loudoun County Commissioner of the Revenue

Dear Mr. Wertz:

I am responding to your request for an official advisory opinion in accordance with § 2.2-505 of the Code of Virginia.

Issue Presented

You ask whether a distribution from a retirement account that is deposited into another retirement account, or into another investment account that the taxpayer characterizes as a retirement account, would be income for purposes of calculating total combined income for the tax relief program for elderly and disabled persons under § 58.1-3211.

Response

It is my opinion that a distribution from a retirement account deposited into another retirement account, or into another investment account that the taxpayer characterizes as a retirement account, is not income for purposes of calculating total combined income for the tax relief program for elderly and disabled persons under § 58.1-3211.

Background

You seek guidance concerning the treatment of retirement account distributions, commonly referred to as rollovers, for purposes of determining eligibility for the exemption or deferral of taxes on property of certain elderly and handicapped persons under § 58.1-3211.

You advise that there are substantial differences of opinion regarding what distributions from retirement accounts, if any, should be excluded from total combined income for purposes of elderly or disabled persons qualifying for tax relief. You relate that elderly or disabled property owners occasionally transfer monies between retirement accounts or other investment accounts, often referred to as a "rollover" for federal income tax purposes. You also advise that some Virginia localities disregard a rollover when determining total combined income. The reasoning is that such rollovers generally are placed into another retirement account within sixty days, thus satisfying the Internal Revenue Service requirement and avoiding payment of penalties and taxes on the distribution.

Finally, you advise that you are aware of a 2006 opinion regarding income from IRAs, 401Ks, and similar retirement plans.[1] You observe that the opinion concludes that distributions from retirement plans, including lump sum and periodic distributions, should be considered income.[2] However, you note that the opinion does not mention distributions from one retirement plan deposited into another plan or monies distributed from a retirement fund into another form of account with the intent to use such account as a retirement fund.

Applicable Law and Discussion

Section 58.1-3211(1)(a) requires that "the total combined income received from all sources during the preceding calendar year" be used to determine income. Further, § 58.1-3211(5) provides that "income shall mean total gross income from all sources, without regard to whether a tax return is actually filed. Income shall not include life insurance benefits or receipts from borrowing or other debt."

A prior opinion of the Attorney General (the "1992 Opinion") notes that "the exemption authorized by § 58.1-3210 is to provide relief to elderly or disabled individuals who bear a tax burden on their real estate that is extraordinary in relation to their income.[3]" The 1992 Opinion concludes that in deciding whether income is part of the "total combined income" contemplated by § 58.1-3211, "the focus of the inquiry is whether the income is available to meet expenses."[4] Another opinion of the Attorney General notes that the term "income" generally has no accepted meaning in income tax law and concludes that the General Assembly did not intend to refer to income tax principles when using the term "income" in § 58.1-3211.[5] Income is "the amount of money received on a regular basis and thus available to meet expenses."[6]

Generally, under the Internal Revenue Code, "any amount paid or distributed out of an individual retirement plan shall be included in gross income by the payee or distribute, as the case may be, in the manner provided under section 72."[7] However, § 72 permits certain tax-free rollovers.[8] Any amount paid or distributed to an individual for whose benefit the account or annuity was established is not taxed if the entire amount received is paid into an individual retirement account or annuity, other than an endowment contract, not later than the sixtieth day after the day on which he receives the payment or distribution.[9] However, this rule does not apply to any amount received by an individual "if at any time during the [one] year period ending on the day of such receipt such individual received any other amount … from an individual retirement account or an individual retirement annuity," which was permitted to be received tax-free under such rule or any other rules permitting tax-free rollovers.[10]

Tax-free rollovers do not constitute income because such rollovers do not represent an amount of money received on a regular basis that is available to meet expenses. Therefore, distributions from one retirement account deposited into another retirement account or an investment account to be used as a retirement account, which are not readily available to meet expenses, cannot be counted as income for purposes of total income under § 58.1-3211.

Conclusion

Accordingly, it is my opinion that a distribution from a retirement account deposited into another retirement account, or into another investment account that the taxpayer characterizes as a retirement account, is not income for purposes of calculating total combined income for the tax relief program for elderly and disabled persons under § 58.1-3211.

Thank you for letting me be of service to you.

Sincerely,

Robert F. McDonnell
Attorney General

1. 2006 Op. Va. Att'y Gen. 199.
2. Id.
3. 1992 Op. Va. Att'y Gen. 175, 176.
4. Id. at 177. Prior Opinions of this Office interpreting § 58.1-3211 consistently have applied this rule. See Op. Va. Att'y Gen.: 1987-1988 at 527, 528; 1985-1986 at 304, 304; see also 1981-1982 at 354, 356; 1976-1977 at 294, 294-95; 1973-1974 at 401, 401 (interpreting § 58-760.1, predecessor to § 58.1-3211, and noting that income is compensation paid on regular basis and intended for daily expenses).
5. 1987-1988 Op. Va. Att'y Gen., supra note 4, at 528 (concluding that term "income" must be given its ordinary meaning in context of statute).
6. 1985-1986 Op. Va. Att'y Gen., supra note 4, at 304; see also 1976-1977 Op. Va. Att'y Gen., supra note 4, at 295 (defining "income" as "amount of money coming in on regular basis and thus available to meet expenses").
7. 26 U.S.C.A. § 408(d)(1) (West Supp. 2008).
8. Id. § 408(d)(3)(A) (West Supp. 2008).
9. Id. § 408(d)(3)(A)(i) (West Supp. 2008).
10. Id. § 408(d)(3)(B) (West Supp. 2008).