You can't deduct anything that was never reported in your income in the first place. If you use accrual based accounting, and booked the rent revenue and paid tax on it at the time (even though you didn't receive it) you have an adjustment now, but it would be on your schedule E, not your personal return. Assuming you are a cash-based taxpayer and only pay tax on income when it is actually received, the fact that you never received the income means you never pay tax on it. That's your tax "reduction." You can't subtract an item from your income that was never included in your income.
