Security Deposit Accounting for Landlords: When Is a Deposit Income?
A security deposit sits in your account, but it usually isn't income. IRS Publication 527 sets out when it becomes income, and when a so-called deposit is really advance rent.
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- To return to tenant
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- Total received
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A "deposit" agreed as final rent is income when received, per Pub. 527.
The three cases
| Situation | Treatment under Pub. 527 |
|---|---|
| Deposit you plan to return at the end of the lease | Not income when you receive it |
| You keep part or all of it because the tenant didn't live up to the lease | Include the amount you keep in income in the year you keep it |
| A "deposit" that is to be used as the final payment of rent | It's advance rent: include it in income when you receive it |
Bookkeeping that keeps this straight
Record deposits in a separate deposits held column or account, not in rent income. When a tenant leaves, log three numbers: amount returned, amount kept (and why: damage, unpaid rent), and the date. The amount kept moves to income that year. If the kept amount pays for a repair, the repair is a normal expense on Schedule E line 14.
State and local laws on holding deposits, interest and return deadlines vary widely; check yours. This page covers the federal income-tax side only.
Quick answers
Is a security deposit taxable income for a landlord?
Not when received if you plan to return it, according to IRS Publication 527. Any part you keep because the tenant broke the lease is income in the year you keep it.
What if the deposit is the last month's rent?
Publication 527 treats an amount called a security deposit that is to be used as a final payment of rent as advance rent, included in income when you receive it.
Keep landlord books in these categories
Our rental spreadsheets use Schedule E-style expense categories (you can rename them), track security deposits separately from income, and total everything per property: