Can a federally taxable IRA distribution qualify for Virginia's first-time home-buyer savings-account subtraction when used to buy a first home?

Plain-English summary

A couple withdrew money from IRAs to buy their first home and claimed Virginia's first-time home-buyer savings-account subtraction. Virginia initially denied it.

The Department said an IRA could qualify, because the distributions were federally taxable income attributable to the account. But the couple still had to prove that the accounts met all program requirements and balance limits.

What the subtraction covers

Va. Code § 58.1-322.02(25) lets an account holder subtract federally taxable interest, capital gain, or other income attributable to a designated first-time home-buyer savings account. Distributions must pay or reimburse a qualified beneficiary's down payment and allowable closing costs for a Virginia single-family residence.

The Forms 1099 showed the entire IRA distributions were federally taxable. That satisfied the taxable-income element; the fact that the account was an IRA did not automatically disqualify it.

What the taxpayers still had to prove

For the first year claiming the subtraction, Virginia's guidelines required a return statement identifying:

• other account owners;
• account number or identifier;
• cash or marketable-securities principal;
• year-end principal and interest;
• annual withdrawals; and
• beneficiary or beneficiaries.

Principal could not exceed $50,000, and combined principal and interest could not exceed $150,000. The couple did not provide statements showing 2015 withdrawals and the year-end balances.

Virginia gave them one last 30-day opportunity. It would allow the subtraction if the documents proved eligibility; otherwise the assessment would stand.

What this means for you

• An IRA is not automatically excluded. The account can qualify if it is properly designated and meets the savings-account rules.
• Using the money for a first home is only one condition. Account disclosures and statutory limits still matter.
• Keep year-end and withdrawal statements. Virginia needs them to test the $50,000 and $150,000 caps.
• The subtraction covers taxable account income, not a blanket exclusion for every withdrawal.

Common questions

Q: Did Virginia hold that every first-home IRA withdrawal qualifies?

A: No. It said the IRAs could qualify if all first-time home-buyer account requirements were proven.

Q: Why did the Forms 1099 help?

A: They showed the distributions were federally taxable, satisfying one statutory condition.

Q: What records were still missing?

A: Statements showing 2015 withdrawals and principal/interest remaining at year-end, plus the required account information.

Citations and references

• Va. Code § 58.1-322.02(25) — first-time home-buyer account subtraction
• 2014 Acts of Assembly, Chapter 729 — establishing legislation
• Related Virginia guidance: P.D. 15-2, First-Time Home Buyers Savings Account Guidelines

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 19-56

Original ruling text

May 14, 2019

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will respond to your letter in which you seek correction of the individual income tax assessment issued to * (the “Taxpayers”) for the taxable year ended December 31, 2015.

FACTS

The Taxpayers used distributions from individual retirement accounts (IRAs) to purchase their first home. The Taxpayers filed a 2015 Virginia individual income tax return and claimed a subtraction for the distributions for income attributable to a first-time home buyer savings account. The Department denied the subtraction and issued an assessment. The Taxpayers appealed, contending that an IRA may be considered a first-time home buyers savings account that is eligible for the subtraction.

DETERMINATION

During the 2014 Session, the Virginia General Assembly enacted House Bill 331 (2014 Acts of Assembly , Chapter 729), which allows a taxpayer to designate an account at a financial institution as a first-time home buyer savings account. Distributions from such accounts must then be used for the purpose of paying or reimbursing the down payment and allowable closing costs for the purchase of a single-family residence in Virginia by a qualified beneficiary. An account holder may subtract any interest, capital gains, or other income attributable to such account to the extent it is subject to federal income taxation. See Virginia Code § 58.1-322.02 25.

The Form 1099s provided indicate that the entire amount of the distributions were subject to federal income tax. As such, the distributions met the requirement of being “other income attributable to such account to the extent it is subject to federal income taxation.” Therefore, as long as the account otherwise met the requirements of being a first-time home buyer savings account, the IRAs would have qualified.

The Department has issued First-Time Home Buyers Savings Account Guidelines (the “Guidelines”). See Public Document (P.D.) 15-2 (1/7/2015). The Guidelines require that for the first taxable year when the subtraction is claimed, the taxpayer must attach a statement to the return indicating:

• The names of any other individuals with an ownership interest in the account;

• The account number or other account identifier;

• The type of principal (cash or marketable securities) contributed to the account;

• The amount of principal and interest in the account as of the last day of the taxable year;

• The amount of any withdrawals from the account during the taxable year; and

• The account beneficiary or beneficiaries.

First-time home buyer savings accounts have a principal limit of $50,000 and a combined principal and interest limit of $150,000. In order to verify that the limits were not exceeded, the Department attempted to obtain account statements from the Taxpayers. To date, these statements have not been provided.

The Taxpayers will be provided one last opportunity to provide the information requested. The Taxpayers must submit documentation within 30 days of the date of the letter indicating the amount of all withdrawals from the accounts during the 2015 taxable year and the amount of principal and interest remaining in the accounts, if any, as of the last day of that taxable year. The documentation must be provided within 30 days of the date of this letter to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23161-7203, Attention: *. Upon receipt, the information will be reviewed and the subtraction will be permitted, if warranted. If the information is not submitted within the time allotted, then the assessment will be considered to be correct.

The Code of Virginia sections and public document cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department’s web site. If you have any questions regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1870.M

Related Documents

15-2