Hi! Thank you for reading this. 🙂
In 2021, property taxes and insurance were deducted on schedule E for a commercial rental property with active participation. There was a loss of -$6,000 for the rental which offset dividend and IRA income. Adjusted gross income line 11 was $44,000, taxable income line 15 was $27,000. Line 16 1040 tax was $0. A $3,400 refund was received due to the calculation of Premium Tax credit on form 8962.
On January 5th 2022, the rental property sold. A total of $3,800 for the prorated taxes and insurance policy refund were reimbursed. I am unsure how to handle the $3,800 recovery. I read this link: https://www.jklasser.com/askjk/i-received-a-refund-of-property-taxes-i-paid-on-my-rental-property-tw... which mentions tax benefit rules, but I’m a bit confused.
In 2021 the Federal tax was $0, but the Adjusted Gross Income gave a refund from the premium tax credit. If I recalculate the 2021 taxes as if the insurance policy and tax refund were instead refunded in 2021, there still would have been a rental loss. However, the premium tax credit refund would have been $600 less because the adjusted gross income would have been higher.
In 2021, for Pennsylvania state tax purposes income was $40,000 since PA doesn’t tax retirement distributions. The -$6,000 rental loss is not allowed to offset other income or be carry forward or back. It counted as $0. So if I recalculate the PA state taxes as if the insurance policy and tax refund were instead refunded in 2021, there still would have been a loss and it still would have been $0 with the same taxable income. It doesn’t seem like it benefited PA taxes.
For federal and Pennsylvania taxes in 2022, how much of the $3,800 refund is taxable as income and can you explain why?
If so, should this refund income be placed on Schedule E line 3 “Rents Received” or Schedule 1 1040 “Other Income” on line 8z? If I put it on Schedule E, it always carries over to the state tax Schedule E.
Thank you ever so much! 🙂 I also rounded the figures. 🙂
