Quick answer

Federal tax guidance generally says not to include a security deposit in income when it is received if the landlord plans to return it. If the landlord keeps all or part because the tenant did not meet lease obligations, the retained amount can become income depending on how related repair expenses are treated. A deposit designated as final rent is advance rent.

Keep deposits separate from rent in the ledger

Record refundable deposits in a liability account by tenant and property. Do not combine them with rental income simply because the funds arrived through the same bank or payment platform.

Reconcile the liability balance with leases and bank records. State law may require a separate account, interest, notices or other handling procedures.

Advance rent is different

An amount called a deposit that is intended to pay the last month’s rent is generally advance rent for federal tax purposes and is included in income when received. The lease wording and actual arrangement matter more than the label alone.

Separate prepaid rent, pet fees, nonrefundable move-in fees and refundable pet deposits. State law can limit or define these charges.

Accounting when money is retained

At move-out, document unpaid rent, permitted damage charges and the amount returned. Federal tax treatment of retained deposits can depend on whether the landlord deducts the related repair expense.

Use a move-in condition record, dated photographs, invoices and an itemized statement. Ordinary wear and tear and allowable deductions are governed by state law and the lease.

Do not spend refundable deposits as operating cash

Even when state law allows deposits to be held in the landlord’s normal account, the amount remains potentially payable to the tenant. Treating it as available cash can create a shortage at move-out.

A property reserve fund should be separate from tenant-deposit obligations. Track both amounts independently.

Build a state-specific compliance calendar

Security-deposit caps, receipt requirements, account rules, inspection rights, return deadlines, itemization and penalties differ by state and sometimes city. Federal tax guidance does not replace these rules.

Create a checklist for move-in, annual account review, move-out inspection, itemized deductions and return. Have the lease and process reviewed for the property’s jurisdiction.

Rental Security Deposit Accounting checklist

  • Create a liability account for each deposit
  • Separate advance rent and nonrefundable fees
  • Document move-in condition
  • Reconcile deposits to leases monthly
  • Use state-specific return deadlines
  • Keep repair invoices and itemized statements

Frequently asked questions

Is a refundable security deposit taxable when received?

Generally not for federal tax purposes if it is expected to be returned, subject to the actual arrangement.

Is last month’s rent a security deposit?

No. An amount intended as final rent is generally advance rent, even if the lease uses deposit language.

Can a landlord keep a deposit for normal wear?

State law typically governs permissible deductions and distinguishes damage from ordinary wear. Obtain local legal guidance.

Research transparency

How this guide was prepared

This guide summarizes publicly available U.S. government, regulator or industry-source material listed below. It explains planning concepts and questions to verify; it does not provide a property-specific quote, inspection, coverage decision, legal opinion or tax advice.

Read our research methodology and editorial standards.

Sources and references

Sources were checked for this guide on July 27, 2026. Policy terms, tax rules, insurance forms, incentives and local requirements can change.

General-information disclaimer

This guide is for general planning only. It is not a quote, policy interpretation, legal advice, tax advice, engineering advice or a substitute for a licensed professional who can review your property and documents.