Taxability of state-issued RE tax credit?

First you must determine what the rebate represents. You must look to state statutes. If the statute says it is a refund or rebate of property taxes, then the mere fact that application is made on an income tax return does not change its character. So, if it is a property tax rebate/refund/credit, etc., then you use the rules that have been published in a set of rulings for a bunch of states.

If the rebate is for taxes paid in the same year, you just reduce the amount pf property taxes eligible for a deduction. You would only have taxable income to the extent that the rebate exceeded the current year taxes.

If the rebate is for taxes paid in a prior year, then you use the tax benefit rule. If you did not take a tax deduction, then there is no income unless the rebate exceeded what you paid. If you took a tax deduction, then you must compute the tax benefit to determine how much if any of the rebate is taxable income.

Any rebate that is based on rent paid would not be income as there is no tax benefit attributable to rent paid.... i.e., you can't deduct the rent on your home.

As an aside, here in New Mexico, there is a twist to the property tax rebates (applied for on the income tax return, but clearly stated in the statute as a property tax rebate). We have two types of rebates. One is for the whole state and the other is for homes in Santa Fe and Los Alamos counties. You can get both. The rebate is not based on the property taxes paid it is based on property taxes billed. The whole state rebate also includes a benefit using rent paid. Eligibility is age

65 and household (taxable & nontaxable) income under $16K for all filing statuses. The two county rebate is any age and household income under $24K for any filing status. Because of the eligibility rules and the fact that most people pay their property taxes, I have never come upon an individual who did not pay his taxes or if they didn't pay their taxes would have a tax liability if the rebate had to be considered taxable on the federal return. But I have always wondered whether a NM property tax rebate for property taxes "billed but never paid", had to be declared as income on the 1040. I could probably make an argument for yes and no.

Where can I find those rulings?

Pub 530:

Refund or rebate of real estate taxes. If you receive a refund or rebate of real estate taxes this year for amounts you paid this year, you must reduce your real estate tax deduction by the amount refunded to you. If the refund or rebate was for real estate taxes paid for a prior year, you may have to include some or all of the refund in your income. For more information, see Recoveries in Publication 525, Taxable and Nontaxable Income.

It would appear MA contrues it as a state income tax credit:

(2) An owner or tenant of residential property located in the commonwealth, who is 65 years of age or older, who is not a dependent of another taxpayer and who occupies said property as his principal residence, shall be allowed a credit equal to the amount by which the real estate tax payment or the rent constituting real estate tax payment exceeds 10 per cent of the taxpayer's total income, but the credit shall not exceed $750.

(FWIW, MGL 62 Section 6 is all about the various state income tax credits that MA allows. Also, all the numbers pertaining to this particular credit are indexed for inflation, so the 2013 credit is in fact $1030, not $750. The new numbers are announced by regulation each year.)

When you file your 2013 return (in 2014), the credit on the 2013 return is computed from the RE tax actually paid in calendar 2013. Though of course any refund caused by the credit arrives in 2014.

Which is why I said you had to look at the statute.

Without necessarily disagreeing with anything anyone else has contributed, I would simply point out that a tax credit is not a refund or a rebate.

Sometimes, but not always, credits result in a reduction of property basis, or a reduction in related expenses deducted.

-Mark B.