Rental property (1065) - how to deal with seller credit for prorated property taxes?

[jmeltzer]

Last year I purchased a rental property to be operated under an LLC. At the time the property taxes had not been paid yet. I was credited at closing for the seller's prorated portion of the year's property taxes.

Should this prorated credit be considered income to the business, or be subtracted from the cost basis of the property for depreciation purposes?

[MinhT1]

This prorated portion of property taaxes should be substracted from property taxes you paid in 2021. So your property tax expenses will be reduced by that portion that you received as a credit at closing.

If you have not (yet) paid property taxes in 2021, then that portion should be reported as Other income.

[Carl]

Should this prorated credit be considered income to the business

It depends. If you paid property taxes on that property in 2021, then just subtract the prorated amount from what you actually paid.

If you did not pay property taxes on that property in 2021, then include the credit in the rental income received in 2021.

If you have not (yet) paid property taxes in 2021, then that portion should be reported as Other income.

No. It gets included in rental income. Reporting it as "other" income may treat it as earned income. Long term residential rental income is passive, not earned.