If the IRS form 1099-K reports $10,000 in rental income and $1,000 for the tenant's security deposit, consider this approach.
Report the full $11,000 IRS form 1099-K income but report an additional expenditure line titled '1099-K in error' or similar for the $1,000 for the tenant's security deposit.
This method would report the full IRS form 1099-K amount but still accurately reflect rental income and expense.
In any case, retain a record in your tax files of how the income was reported, should a tax authority have questions at a later time.
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