Management company count Tenant Deposit as Income on 1099

[David London]

My previous management company included in the 1099-Misc as 'Other Income' the tenant deposit they returned to me after I moved my properties to another management. The leases for my two houses are until May 2023 and assuming all go well (good tenants so far) tenants are supposed to get all their deposits back.

The IRS publication (topic no. 414) is very clear that security deposit should not be counted as rent unless it is not being returned in full at which point the part which is being withheld is treated as income (and at the same time is offset against damages expenses or covering unpaid rent).

The management insists that since they send me a check for the deposit then it should be counted as rent...doesn't make sense to me since this is technically tenant money which I am not supposed to touch unless tenants violate the lease in specific ways.

This is a large management company that operates in 7 states, not a flyby operation...one would think they know what they do.

To top it they also included as 'Other Income' the owner reserve fund which I was required to have in my account for incidentals...which is practically counting as income money I gave them...In other words me giving them money and they counting it as income when they returned it back to me!

Any advice appreciated...especially from other PMs