I reported the sale of an inherited home FMV (Spring 2006) minus closing cost as a capital loss (sold Decmber 2007) in 2008 on my 2007 returns. I did not include the payment of MD non-resident sales tax as either a closing cost or tax paid on my federal or home state forms as I knew it would be re-imbursed ( I had no there "income" from MD. I filed MD state non-residence income tax forms and was (eventually) re-imbursed for the sales tax in 2008. I consulted several tax lawyers/accountants and was told this was recover of taxes paid (most of them, even the MD accountants, questioned MD legality in withholding this tax) and not income. Do or do I not need to file it as income?

If you did NOT claim it as either a deduction on Schedule A or in the basis of the home sold, then it is NOT income.

It is merely a tax refund, which generally is NOT considered to be taxable income.