If the 1099-INT is made out to you, just report the interest and be done with it. I seriously doubt it's going to make any difference on your tax liability at all. Not even a penny difference.
MA law requires a security deposit be kept in a local bank under a special account which does not generate a 1099-INT.
Florida law is similar. For my 3 rentals, I've got their deposit in what is referred to as an escrow account. One of the accounts does pay interest. However, no 1099-INT is issued until such time the funds from escrow are released. Who the 1099 is made out to, depends on who it's released to.
When a tenant vacates, I have to do a "dissolution of deposit" and send to the tenant. I have 15 days after the tenant has vacated, to send the letter. If the tenant is getting all of their deposit back, I usually include a check with that dissolution of deposit. That check will include accumulated interest to date. Once the check clears, I provide the bank with a copy of the deposit letter and they release the funds to me. The 1099-INT is sent to the former tenant at their new address.
If I am making claim to the deposit or any part of it, the tenant has 30 days from the date I sent the dissolution letter to contest my claim. If they do not contest it within that time frame, I again provide the paperwork to the bank and they release the funds to me. If returning a part of the deposit, the part I return must include the total interest. So the tenant still gets the 1099-INT.
If my claim exceeds the deposit, thus including the interest, then I get the 1099-INT.
Typically (at least in FL) when an escrow account of this type is set up, the landlord is the custodian of the account, while the tenant is the beneficiary until such time the landlord makes legal claim to the funds. The bank will not release those funds to either party until such time documentation is provided proving who is entitled to it.
I don't know the details of MA law on this and I'm no legal authority by any stretch. But I would expect that if you did not set up the account as escrow for the tenant, that makes you liable for taxes on the interest, regardless of who that interest belongs to. But again, I'm seriously doubt the interest on that one account for a single tax year will have any impact on your tax liability.
