I received a refund of property taxes I paid on my rental property two years ago. What should I do?

You don’t have to amend the return on which the taxes were deducted. Instead, you report the income on the return for the year of the refund under the tax benefit rule. This rule says that you pick up income to the extent you received a tax benefit (e.g., deduction) for it in the prior year. Because the rules for deducting expenses of rental property are subject to the passive activity loss (PAL) rules, you may not have received a tax benefit requiring you to report the income (you would have to adjust your carryover losses). Discuss your situation with a tax professional.