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Rental - Kept Security Deposit - 1099-MISC - Box 1 Rents or Box 3 Other Income

I own a rental property. I had a tenant abandon the property and so the security deposit was kept. The property management company reported this on the 1099-MISC as Box 3 Other Income. Should it be considered Box 1 Rents, since the income was the result of a rental? The only guidance I can find from the IRS is non-specific on if it should be Box 1 or Box 3 - Only stating "If you keep part or all of the security deposit because the tenant breaks the lease by vacating the property early, include the amount you keep in your income in that year." (irs.gov/taxtopics/tc414).

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3 Replies
MaryK4
Employee Tax Expert

Rental - Kept Security Deposit - 1099-MISC - Box 1 Rents or Box 3 Other Income

Yes, you would want to add it to your Box 1 amount as Rent so that it is reported in TurboTax on your Schedule E.  If you enter it as Box 3, TurboTax wants to treat it as other income which is not correct for the tax return.  As far as the way the property management company report it to you om the 1099-MISC, there was not definitive guidance for how to report it.  I think because it was not Rent- for using the property, the management company placed it as Other Income to differentiate, but for tax reporting purposes, you are correct that it should be included as Rent on the Schedule E.

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Rental - Kept Security Deposit - 1099-MISC - Box 1 Rents or Box 3 Other Income

So how does one do this in TurboTax? As is, it is automatically applying Box 1 to the Schedule E / The Rental, but when I enter Box 3 it gives the following on the next page "Can't report this income here. You entered other income of XXXXX on this Form 1099-MISC. You can't report other income on a rental property. You can report this income on another form or schedule later in the Interview". So do I have to have the management company change the 1099-MISC? Is there something else I am supposed to do here?

AmyC
Employee Tax Expert

Rental - Kept Security Deposit - 1099-MISC - Box 1 Rents or Box 3 Other Income

The income must go in box 1 for your tax forms. You can ask for a corrected form and keep proof of your conversation. For example, call and then follow up with an email recapping the conversation. They might issue  a corrected form but quite possibly, will not. As long as you can show the IRS what happened and explain it, if they ask, all is well. Keep your records for any rental the entire life of the rental plus at least 3 years.

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