@VTXtools 

Great questions.

"1) should I create a non inventory item called XYZ Trade In and set the expense account to sales discount. Use that new item to issue credit memo to customer and when I receive back the Refurb XYZ I just inventory it with a cost reflecting the refurbishment?"  That sounds like a good process to me.  That will reduce your income by the amount of the credit.  You can then apply the credit to future invoices or issue payment to your customer for the credit.

"2) But I need to now apply the cost of the credit that was issued to the customer to that particular Refurb XYZ so that the cost is sitting in the correct place. Meaning, I would need to somehow debit sales discount and increase the cost of that particular Refurb XYZ by the trade in value?"  This was fully accounted for in #1.  You reduced your sale income (debit) by the amount of the discount with a corresponding reduction (credit) to A/R, and then received Refurb XYZ into inventory at the cost the vendor charged for the refurb.  You can't give a sales discount and increase your inventory cost of Refurb XYZ - it is one or the other.  IMO, this is a sales discount since the full cost of Refurb XYZ will be capitalized into inventory when you receive the item and bill from the vendor.   

"3) In the event the XYZ Trade In I would follow the same process, debit sales discount, XYZ Trade In, increase/credit cost to the original sale of the XYZ?"  This was also accounted for in #1.  When you issue the credit memo for XYZ Trade In, that debited (reduced) your sales income and you now have the credit to apply to a future invoice or you can issue payment to your customer.  You can make a note in the memo field to tie it back into the original invoice/sales receipt but since the sale and subsequent discount may happen in different periods (sale in December, credit in January), they should be recorded separately.