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I like Ira's answer

Ira will correct me if I'm wrong, but I'm pretty sure he was also assuming that you had already reported the stolen rents as income first.

My concern here is that you can't have a tax-free benefit. You either report the stolen rents as income when the manager received them and then the reimbursement from the state's fund is a non-taxable recovery of the loss, or you don't report the rent from the tenant and then report the payment from the state's fund as income.

Pick one or the other. But not reporting the rents AND not reporting the reimbursement could get you into trouble.

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