Get your taxes done using TurboTax

If you don't report the "income" from the 1099, the IRS will contact you when your return doesn't match their information. The problem is that amounts in box 3 can't be reported  as income in your rental schedule ( your former property manager didn't report this correctly). 

It would be entered as "Other Income." Make sure that in the interview questions you say that it wasn't related to your main job, and it didn't involve an intent to earn money. That way the income will show on line 21 of your return, and you won't be charged Self-Employment Tax.Then you would take a corresponding deduction for the same amount. The simplest way to do that would be to enter it as a miscellaneous Rental expense, with a description. See the screenshot below.

Here's How:

1. Enter your 1099-MISC in the Rental Income section, including the amounts in Box 1 and Box 3.
2. The next screen will tell you that you can't report Box 3 income here, and you'll handle it later.
3. Since you are in the rental section already, deduct that returned deposit as a miscellaneous rental expense.
4. Next, in TurboTax Home and Business, click the Personal Tab, and go to Personal Income. 
5. Go to Other Common Income, and Update 1099-MISC.
6. Click Edit on the 1099-MISC that shows there.
7. Follow the prompts, saying that it's not like your main job, and doesn't involve an intent to make money.
8. On the screen Choose the source of this rental income (the amount in Box 1), choose Rental Property.
9. Click on the rental property which generated the 1099 income.

After you are done, your Rental income will include your 1099-MISC for the box 1 amount and a deduction for the Box 3 amount. It will show as part of Line 17 on your 1040. The returned deposit will show on line 21. I've attached more screenshots, and the 1040 form, showing lines 17 and 21. For line 17, I input $30,000 from box 1 of the 1099-MISC, and $3000 for the returned deposit, netting out to $27000. 

Line 21 is the returned deposit amount.

Rental security deposits aren't considered to be income if they may be required to be returned to the tenant at the end of the lease. https://www.irs.gov/taxtopics/tc414

[Edit 03/06/18 12:27 PM]