My spouse and I signed a contract to buy a home in another state and took an IRA distribution to fund it before we actually moved out of Virginia -- is that distribution taxed as Virginia income or as income from our new state?

Plain-English summary

This ruling drives home a rule that catches a lot of people who are actively in the process of relocating: intending to move, and even taking concrete steps toward it, is not the same as legally changing your domicile until you actually get there.

A couple filed a part-year Virginia resident return for 2018, listing a Virginia residency end date of May 11, 2018. Under audit, the Department found that an IRA distribution the couple had classified as income from their period of nonresidency was actually received on May 3, 2018 -- before they physically left Virginia. The auditor moved that distribution into their Virginia-residency income and assessed additional tax. The couple appealed, arguing that because they'd already shown intent to change domicile to their new state (State A) -- including signing a contract in April 2018 to buy a home there -- the distribution should count as income earned after their Virginia residency ended.

The Department disagreed. To change legal domicile, Virginia law requires two things together: (1) actually abandoning the old domicile with no intent to return, and (2) physical presence at the new location with intent to remain there. The couple had taken the IRA distribution specifically to fund the purchase of their new home while their Virginia home sale was still pending -- meaning they were still living in Virginia at the time. They didn't obtain out-of-state driver's licenses, register their vehicles, or register to vote in the new state until after their reported May 11, 2018 residency end date, and they didn't physically leave Virginia until May 9, 2018. Since they weren't yet physically present in the new state (with intent to remain) on May 3 when they received the distribution, their domicile change hadn't yet happened, and the distribution was properly taxed as Virginia income.

What this means for you

Anyone relocating across state lines mid-year

Signing a contract, forming an intent to move, or even taking active steps to prepare for a move (like arranging financing) doesn't by itself end your Virginia domicile. You need to actually be physically present in the new state, with intent to stay, before a change of domicile is complete -- and until then, income you receive is still attributed to Virginia.

Anyone timing an IRA distribution, bonus, or other lump-sum income around a move

The date you receive income matters enormously. If you're mid-move, income received before you physically arrive and settle in the new state will generally be attributed to your old state of residence, even if you already intend to relocate and even if the funds are earmarked for the new home.

Accountants and tax professionals

This ruling restates the two-part domicile-change test (abandonment + physical presence, citing Coopers Adm'r v. Commonwealth, a 1917 Virginia Supreme Court case) and applies it strictly to a timing dispute. It's also a reminder that objective markers -- new driver's license, vehicle registration, voter registration -- are evaluated by the DATE they actually occurred, not by when the client says they intended to get around to them.

Common questions

Q: If I've already signed a contract or lease in my new state, does that end my Virginia domicile?
A: Not by itself. Virginia requires both intent to abandon your old domicile AND actual physical presence at the new location before the change is complete.

Q: I received income (like an IRA distribution) while I was in the process of moving -- which state taxes it?
A: It's generally attributed to wherever you were domiciled/resident on the date you received it. If you hadn't yet physically relocated when the income arrived, it's typically still taxed by your old state.

Q: What evidence does Virginia look at to determine when a domicile change actually happened?
A: Objective, dated actions -- when you physically left, when you obtained a new driver's license, registered vehicles, or registered to vote in the new state -- compared against the date the disputed income was received.

Citations and references

• Va. Code § 58.1-302 (domiciliary resident and actual resident defined)
• Va. Code § 58.1-303 (part-year residents taxed only for their period of Virginia residence)
• Coopers Adm'r v. Commonwealth, 121 Va. 338, 93 S.E. 680 (1917) (neither physical presence alone nor intent alone creates a new legal domicile)
• P.D. 18-179 (10/24/2018) (applying the two-part domicile-change test)
• P.D. 16-130 (6/26/2016), P.D. 17-65 (5/10/2017), P.D. 19-20 (3/26/2019), P.D. 20-30 (3/4/2020), P.D. 21-15 (2/16/2021) (income is attributed to the period of Virginia residency based on the taxpayer's residency status on the date received)
• P.D. 99-173 (6/30/1999) (an IRA distribution received before a residency end date is Virginia income even if earmarked for a new home in the taxpayer's new domicile)

Subject

Residency : Domicile - Physical Presence Required to Change; Part year - Income Received while Virginia Resident

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 22-43

Original ruling text

March 15, 2022

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply 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, 2018.

FACTS

The Taxpayers filed a part-year Virginia resident income tax return for the 2018 taxable year listing a Virginia residency end date of May 11, 2018. Under review, the Department determined that an individual retirement account (IRA) distribution which the Taxpayers had categorized as income attributable to their period of nonresidency was received on May 3, 2018, before they left Virginia. The auditor adjusted their return to include the IRA distribution in income attributable to their period of Virginia residency and issued an assessment. The Taxpayers appeal, asserting that because they demonstrated the intent to change their domicile to * (State A) before the distribution, the distribution was properly categorized as income attributable to their period of nonresidency.

DETERMINATION

Domicile

Two classes of residents, a domiciliary resident and an actual resident, are set forth in Virginia Code § 58.1-302. The domiciliary residence of a person means the permanent place of residence of a taxpayer and the place to which he intends to return even though he may reside elsewhere. An actual resident of Virginia means a person who, for an aggregate of more than 183 days of the taxable year, maintained his place of abode within Virginia.

In order to change from one legal domicile to another legal domicile, there must be (1) actual abandonment of the old domicile, coupled with an intent not to return to it, and (2) an acquisition of a new domicile at another place, which must be formed by personal presence and an intent to remain there permanently or indefinitely. The burden of proving that the domicile has been changed lies with the person alleging the change. The issue in this case is not whether the Taxpayers changed their domicile, but when the change of domiciliary residence occurred.

The Taxpayers state that they intended to abandon their Virginia domicile and establish domicile in State A in April 2018 when they signed a contract to purchase a residence in State A. They explain that they received the IRA distribution before leaving Virginia so that they would have the funds needed to purchase their new residence in State A while the sale of their Virginia residence was pending. They also took a number of actions consistent with establishing domicile in State A. They obtained State A driver’s licenses, registered their vehicles in State A, and registered to vote in State A. None of these actions, however, took place prior to the reported end date of their Virginia residency, May 11, 2018, on their Virginia income tax return.

While the Taxpayers may have intended to establish domicile in State A earlier than the end date of their Virginia residency, acquiring domicile in a new location requires both intent and physical presence. The Virginia Supreme Court has observed that neither physical presence alone, nor expressed intent alone, are sufficient to create a legal domicile for taxation purposes. See Coopers Adm’r v Commonwealth , 121 Va. 338, 93 S.E. 680 (1917). See also Public Document (P.D.) 18-179 (10/24/2018). The Taxpayers state they did not leave Virginia until May 9, 2018. Therefore, it appears the Taxpayers were not yet physically present in State A with the intent to remain there as of the date of the IRA distribution, May 3, 2018. As such, a change of domicile had not yet occurred.

Part-Year Residents

Virginia Code § 58.1-303 provides that a taxpayer who becomes a resident of another state during the taxable year is subject to taxation for the period in which he was a Virginia resident. Accordingly, Virginia taxable income is computed by determining income, deductions, subtractions, additions and modifications attributable to the period of residence in Virginia. In addition, part-year residents may claim a portion of their Virginia personal exemptions, but the exemptions will be prorated based upon the number of days that the taxpayer was a Virginia resident. Further, part-year residents may claim a prorated Virginia standard deduction if they claim the standard deduction for federal income tax purposes.

The timing of the receipt of income can be a critical tax planning issue for taxpayers to consider when changing residency. The Department has consistently held that income is attributable to the period of residence in Virginia if the taxpayer is a Virginia resident on the date the income is received. See P.D. 16-130 (6/26/2016), P.D. 17-65 (5/10/2017), P.D. 19-20 (3/26/2019), P.D. 20-30 (3/4/2020), and P.D. 21-15 (2/16/2021). In addition, in answering a question related to the timing of taking IRA distributions, the Department ruled that an IRA distribution must be included in income attributable to the period of Virginia residency where it was received before the Virginia residency end date even though the distribution was to be used to purchase a new home in the taxpayer’s new state of domicile. See P.D. 99-173 (6/30/1999).

CONCLUSION

The evidence indicates the Taxpayers remained domiciliary residents of Virginia until they left Virginia and established physical presence in State A on or after May 11, 2018. As stated above, because the distribution at issue was received on May 3, 2018, before the Taxpayers moved out of Virginia, the income was properly included in income attributable to their period of Virginia residency. The assessment, therefore, is upheld and an updated bill will be issued shortly. The Taxpayers should remit payment of the balance due within 30 days of the bill date to avoid the accrual of additional interest and possible collections actions.

The Code of Virginia sections and public documents 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/3874.X

Related Documents

18-179

16-130

17-65

19-20

20-30

21-15

99-173