Are security deposits taxable income for landlords?
Short answer: a refundable security deposit is not income when you receive it. It becomes income only when you keep some or all of it. The exception is when the “deposit” is really prepaid rent.
The three cases
| Situation | Taxable? | When |
|---|---|---|
| Refundable deposit you plan to return at move-out | No | Not while you hold it |
| You keep part of it for damage or unpaid rent | Yes, the part you keep | The year you keep it |
| A “deposit” that will be used as the final month's rent | Yes, it is advance rent | The year you receive it |
Advance rent is taxable in the year you receive it, no matter which period it covers. If a tenant pays January 2027 rent on December 28, 2026, it is 2026 income.
Keeping part of a deposit
Say you hold a $1,500 deposit and keep $400 for a damaged door at move-out. The $400 is rental income (Schedule E line 3) in the year you keep it. The cost of fixing the door is a repair expense (line 14). They often net out, but both should appear.
How to record deposits so they don't distort your numbers
- Record deposits received and deposits returned in categories that are not reported on Schedule E.
- Keep a rent roll showing how much deposit you hold per unit. You need this at move-out anyway.
- When you keep part of a deposit, record that part as rental income (for example, “Other rental income”).
Separately, many states regulate how deposits are held: separate accounts, interest owed to the tenant, deadlines for returning them, itemized deduction letters. Check your state's landlord-tenant law. Those rules have nothing to do with the tax treatment, but they matter just as much.
Landlord Ledger keeps deposits off your Schedule E automatically. “Security deposit received” and “returned” count toward cash flow but not rent. The Rent Roll totals the deposits you're holding, so you always know your liability.
Get Landlord Ledger — $12 Free Lite versionSource: IRS Publication 527, Residential Rental Property (“Rental Income”: advance rent, security deposits). General information, not tax or legal advice.
More guides
- Which Schedule E line? A landlord's expense cheat sheet (2026)
- Rental property depreciation, explained with a worked example
- Repair or improvement? How landlords decide what to deduct now
- How to track rental income and expenses in Google Sheets
- Landlord mileage deduction 2026: 72.5¢, then 76¢ from July 1
- Rental property software vs. a spreadsheet: an honest comparison