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I have a question about a refunded insurance premium on my rental property.

In November 2012 I paid my insurance (fire, liability, etc.) for a year, $1400.

In January 2013 they told me they are canceling my policy because of the condition of my property is not up to their standards. They will send me an appropriate premium refund, let's say $900 for discussion here. The refund will be paid in 2013.

I have gotten insurance from another company for $3000. I paid this in February 2013.

How much do I report on Schedule E for 2012 and 2013? I have looked in the instructions for Schedule E, Publication 537, and Publication 535. I don't see this addressed directly.

Do I report the premium refund as income, or do I reduce the amount I report on line 9 of Schedule E? And for which year?

I can think of 3 possibilities:

1) 2012: $1400 on line 9
2013: $3000 on line 9, list $900 as income (line 3 Rental or line 4 Royalties?)

2) 2012: $500 on line 9 ($1400 - $900 premium refund)
2013: $3000 on line 9

3) 2012: $1400 on line 9
2013: $2100 on line 9 ($3000 – $900 premium refund)

Which one is right, does anyone know? Or there a 4th choice?
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