You will need to report the full amount of cash reported on the 1099-MISC as gross rental income. If the full amount is not reported you will get a letter from the IRS claiming under-reported income. However, you can report the refundable portion of the rent as a miscellaneous rental deduction.
The screen in the rental section where you will make this entry will say "Other Expenses". It will provide a description and amount box. For the description enter "refundable deposits" and the amount for the deposit.
When the deposit is refunded, you need to report any amounts not refunded as part of gross rental income that year.
