Deposits are not income when received
Under IRS Publication 527, a security deposit is not includable in your gross income when you receive it, as long as you are legally obligated to return it to the tenant at the end of the lease. Holding someone else's money in a segregated account is not a taxable event.
This is true even if the deposit sits in your bank account commingled with other funds — what matters for tax purposes is your legal obligation to return it, not how you hold it. (State landlord-tenant laws may impose separate requirements on how security deposits are held.)
When a deposit becomes taxable
A security deposit becomes taxable income in the year you apply it to rent or retain it for damages. If a tenant moves out and you keep $500 for unpaid last month's rent and $200 for repairs, you report $700 as rental income in that year.
If you apply the deposit to a specific expense — like a repair you deduct — the income and the deduction roughly offset each other. But you still must report the deposit as income even if you immediately spend it fixing damage.
Last month's rent paid upfront
If a tenant pays first and last month's rent at move-in, the last month's rent is taxable income in the year received, because there is no obligation to return it. Unlike a security deposit, this payment covers rent you've already agreed to accept and cannot be refunded. Report it as rental income in the year of receipt.
Frequently asked questions
Do I report a security deposit as income on my taxes?
Not when you receive it. Report it as income only in the year you keep part or all of it (applying it to unpaid rent or damages).
What if I never return the deposit?
If you keep the deposit at lease end — for any reason — it becomes taxable income in that tax year.
Are last month's rent and a security deposit treated the same way?
No. Last month's rent is taxable when received. A refundable security deposit is not taxable until you retain it.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.