Magnesium oxide dissolving in distilled water Magnesium oxide is a salt, and salts dissolve in distilled water, due to water being polarized. Therefore I would expect that you would find free ions, which is confirmed by the water conducting electricity. But most sources I find states that magnesium hydroxide is created through a reaction with the water. I would appreciate if someone could tell me what is correct and why the other one is false.
All of that is true, these facts do not contradict each other. 

The missed part is quantification. Salts and generally ion compounds are soluble, but solubility comes in range of many orders of magnitude. 

Also, some compounds, even if largely ionic, react with water.

So magnesium oxide reacts with water forming magnesium hydroxide, both being almost insoluble in water.

Oxide anion  as a very strong Lewis base immediatelly reacts with water $\ce{O^2- + H2O -&gt; 2 OH-}$. So the only chance for metal oxides to stay being oxides is to be insoluble, with their lattice energy too high to be broken by water hydration of ions.