That doesn't sound right. You said rental, which I missed. For a rental, your HOA fees are in fact a deductible expense against rental income on schedule E. It is not a capital improvement and should not change the capital gains unless part of the fee is for a special assessment for a capital improvement. Let's think about a couple of scenarios.
1. You paid monthly HOA fees and were on time. At the closing, the buyer might have paid you a credit for the remaining part of the closing month, since you were paid a few days ahead. This is not an adjustment to your sales price or capital gains, it's just a credit for a prepaid expense. You should only have deducted on schedule E, the net HOA fees you paid after considering the credit. Then, the rebate you received in 2018 is taxable income because it is a reimbursement of a rental expense that you previously deducted. I'll cover this later.
2. You were in arrears (owed the HOA fees) and the buyer was required to pay your back due fees as part of the close. In this case, it is treated as a reduction in the sales price and therefore a reduction in capital gains. The reimbursement is a taxable reimbursement.
3. You paid a full year ahead of time and the closing occurred in the middle of the year and you deducted the rental expense. You got a credit at closing from the buyer -- that should have been adjusted on your schedule E. Since you deducted the HOA fees as a rental expense, the reimbursement is taxable income.
Now, to report the income, depends on whether it was a reimbursed rental expense or really was an adjustment to the capital gains.
If an adjustment to rental expenses, first do a tax benefit analysis. Did you actually get a benefit from deducting the HOA fee. For example, if you were renting below FMV, you can't show a loss. If your rental expenses netted out to zero profit without the HOA fee, then adding the HOA fee did not give you a benefit, therefore the reimbursement is not taxable. But if you did get a benefit (a bigger deduction, therefore less tax owed) then the reimbursement is taxable. Enter it as other uncommon income and look for "taxable recovery" or "reimbursement of a prior deduction."
If you really did take a capital gain adjustment, then you want to report the reimbursement as a capital gain so you pay the lower tax rate on it. Report the check as the "sale" of an asset, with the purchase date the date you bought the house, selling date the date you got the check, purchase price zero, selling price amount of the reimbursement check.
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