You can take either the capital loss or the credit on your 2023 tax return. You should try it out both ways and use whichever makes your 2023 tax lower.
To enter the repayment as a capital loss, enter it as a sale of land. I can't find any official instructions for this type of situation, but here's how I would enter it. For the type of investment select "Land (other investment purpose)." For the description I would write something like "Repayment of 2021 gain." Keep the description short. For the date sold, enter the date that you paid it back. For the acquisition date I would enter the date of the original sale. But I think the type of loss, short-term or long-term, should be the same as the original gain. If it doesn't work out that way, change the acquisition date to make the term come out right. For the proceeds enter the amount that you paid back as a negative number, and for the amount paid enter zero.
Entering the credit is a lot more complicated. First of all you have to calculate the amount of the credit. It's not the amount that you paid back. The credit amount is the difference that it would have made in your tax for the year of the sale if you had not reported the gain that you later had to pay back. TurboTax will not calculate the credit for you. You have to calculate it yourself. To do that you will need the TurboTax software for the year of the sale, and the .tax20yy file for your tax return for that year. Open the tax return and use Save As to save a copy of it with a different name. Work on the copy so that you don't affect the original tax return.
First write down the total tax on the return that you filed for the year of the sale. For 2020, 2021, or 2022 it's Form 1040 line 24. Then change the sale of the land so that the proceeds are only the amount that you got to keep. In other words, subtract the amount that you paid back from the proceeds that you originally reported. TurboTax will recalculate the tax. Take the recalculated tax amount and subtract it from the original tax that you wrote down. The difference is the amount of the credit that you can claim.
To enter the credit in your 2023 tax return you have to go to forms mode. Open the "Form 1040 or Form 1040-SR Worksheet." Scroll way down to the "Other Credits and Payments Smart Worksheet" near the bottom. Enter the credit that you calculated on line D of the "Other Credits and Payments Smart Worksheet." The repayment will then appear on Schedule 3 line 13b, which is "Credit for repayment of amounts included in income from earlier years."
