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.
According to the IRS you Do NOT need to report a security deposit as income unless you had to take the deposit for damage, late rent, etc.
Here is the IRS article - https://www.irs.gov/taxtopics/tc414
if I add the security deposit as income my taxes go up and if I add the security deposit as expense the taxes do not come down back!! There needs to be another way to handle this that does not cause additional tax burden on me for receiving this security deposit
Here's the bottom line. I can 100% guarantee you two things will happen if you don't report the total rental income.
1) You *will* get audited by the IRS.
2) You "will" lose any argument on it with the IRS.
Basically, that 1099-MISC has already been reported to the IRS by the issuer of that 1099-MISC. So if your total rental income from all sources does not equal or exceed the amounts reported in box 1 of all 1099-MISC received, it's a 100% guaranteed audit that you will 100% lose.
I have received two separate 1099-MISC from property management company, one with rent in box 1 and another with security deposit in box 7
Apparently, your property management company is severely lacking in knowledge when it comes to knowing how to treat rental income. Here's the thing:
When it comes to rental property, all income received from "ANY" source for "ANY" reason is rental income. Period. End of Story. If a 1099-MISC will be issued, it all gets reported in box 1 of the 1099-MISC. To the best of my knowledge, there are absolutely no exceptions to this.
Income reported in box 7 is self-employment income that gets reported on SCH C. That type of income is defined as income you "EARNED" by going out and 'DOING SOMETHING", usually on a recurring basis to actually earn it.
Now for you, this late in the game it is just to late to expect a corrected 1099-MISC to be issued to you by the management company. So you need to inform the management company of the "right" way to do things for next year. If they won't do it right, then fire them and find another. Like I always say to those I"m paying for the services, "do it my way, or hit the highway." End of discussion.
For your box 7 income DO NOT enter it in the SCH E section of the program. Instead, enter it as below. Then to "cancel it out" follow the guidance below the "enter the 1099'MISC" stuff.
Reporting 1099-MISC (box 3 or box 7) that is not self-employment income
Under the Wages & Income tab (or Personal Income tab) scroll down to Other Common Income and elect to start/update Income from form 1099-MISC. Then click YES to indicate you have a 1099-MISC.
Enter the 1099-MISC exactly as printed, and then Continue.
Enter the reason you got this money – be it scholarship, bonus, streaking butt naked across the 50 yard line of the super bowl, whatever. Then continue.
Select None of these apply, then Continue.
Select No, it didn’t involve work….. and Continue.
Select ONLY the tax year for which this specific 1099-MISC was issued. Do not select the year that you received the 1099. Select the year for which the 1099-MISC was issued. Select no other year. Then Continue.
Select No, it didn’t involve an intent to earn money, then Continue.
Select NO, then Continue.
Click the DONE button, and that does it.
CANCEL OUT 1099-MISC INCOME THAT IS NOT YOURS, BUT IS HELD BY YOU "IN ESCROW"
Under the Deductions & Credits tab scroll all the way to the bottom.
Elect to start/update Other Deductible Expenses
For Generation Skipping Taxes click NO.
For "...these less common expenses" click NO.
For "...any of these other expenses?" click YES.
Enter the amount of the deposit in the "claim of right repayment over $3000" and continue.
Note that this will probably "NOT" make any difference in your tax liability. But this is the way to do it "ONLY BECAUSE" the deposit amount is incorrectly reported in box 7.
Now you can also file for an extension which will give you until Oct 15 to file your tax return. Then you can take things up with the management company. But understand that if you file an extension, it only extends your time to "file". It "DOES" "NOT" extend your time to pay. So if you even "THINK" you will owe taxes, make your best guess as to how much, and pay them before July 15th. You can do that online at www.irs.gov/payments. (PRINT YOUR RECEIPT!)
Carl, couple of things
1. For "claim of right repayment over $3000", my deposit is below $3000, it $2200
2. Also, even if I enter $3001 for this line for fun, my federal taxes don't drop
I am in communication with my property management company. If they reissue a corrected 1099-MISC, what would I ask them to report the security deposit amount under? As rent n Box 1? Also, is this (reissuing the 1099-MISC) even possible for property management company? It's local and I can collect the reissued 1099-MISC from them tomorrow, if government allows them cancel previous 1099-MISC and issue a corrected one. I still have time till July 15th to file tax returns, or in the worse case I can file extension with taxes and wait for the property management cancel the old 1099-MISC and issue a corrected one, if I know what corrections I need them to make.