Are security deposits taxable?
Updated 2026-10-18, 6 min read
Not when you receive it
A deposit you plan to return is not income. It becomes income in the year you keep it, or at once if it is really the last month's rent. IRS Pub. 527, checked 2026-10-18.
For federal income tax, a security deposit is taxable only when it stops being the tenant's money. That happens when you keep it, or when it was never a deposit at all. This page covers the federal rule only. State rules on how you hold the deposit sit beside it and do not change it.
The rule in Publication 527
The IRS covers deposits in three sentences, in the rental income chapter of Publication 527 (2025 edition, checked 2026-10-18):
"Don't include a security deposit in your income when you receive it if you plan to return it to your tenant at the end of the lease."
If you keep part or all of it during a year because the tenant did not meet the lease terms, you include the amount you keep in that year's income. And if an amount called a security deposit is to be used as the final rent payment, it is advance rent, taxed when you receive it.
What matters is what the money is for, not what you call it. That is also how state deposit statutes work. See what is a security deposit.
Six situations and when each is income
| What happened | Federal tax treatment |
|---|---|
| Deposit received, and you plan to return it | Not income when received |
| Deposit returned in full at move-out | Never income |
| Part or all kept because the tenant broke the lease terms | Income in the year you keep it |
| A "deposit" that the lease applies to the final month's rent | Income when received. It is advance rent |
| Last month's rent collected at signing | Income in the year received, whatever your accounting method |
| Tenant pays you to cancel the lease | Rent, income in the year received |
Each row is taken from Publication 527's sections on security deposits, advance rent and canceling a lease, checked 2026-10-18.
Last month's rent is advance rent
Advance rent is any amount you receive before the period it covers. Publication 527 says you include it in the year you receive it "regardless of the period covered or the method of accounting you use." Being on the accrual method does not let you defer it.
The IRS's own example: a 10-year lease signed on March 18, 2025, with $9,600 received for the first year's rent and $9,600 for the last year's. The landlord includes $19,200 in 2025 income.
The December signing trap
If a lease signed in late December says the "deposit" will cover the final month, that money is income for the year you signed, not the year the tenant leaves. If you mean it as a true deposit, write the lease that way and return it. Record it on a rent receipt under the right label.
Keeping part of the deposit
Say you held $1,800 and kept $450 at move-out for a damaged door. The $450 is income in the year you keep it. The $1,350 you returned never was.
If you then spend $450 repairing the door, the repair is a normal rental expense. Publication 527 allows repair and maintenance costs as long as you are not required to capitalize them. An improvement, as opposed to a repair, is capitalized and depreciated instead. In the usual case the income and the expense cancel out, but both lines still go on the return. More in landlord tax deductions.
- 01Itemise every amount you keep, as your state requires. The deduction calculator builds the statement.
- 02Book the amount kept as rental income in the year you keep it.
- 03Book the repair invoice as an expense when paid, keeping repairs and improvements on separate lines.
- 04Keep the move-in and move-out records with the tax file. See security deposit deductions for what you are allowed to keep.
Interest on the deposit
Publication 527 does not deal with interest on security deposits. Whether a deposit must earn interest, and whether that interest goes to the tenant, depends on your state and sometimes your city. Find your rule through security deposit laws by state and work the figure with the security deposit interest calculator.
Ask before you file
How interest you pay to or keep from a tenant is reported is a question for a tax professional, based on your state's rule. This page sets out what Publication 527 says and nothing more.
Whatever your state requires, send the deposit back on time. The deadlines are in security deposit return deadlines.
Sources read for this page
- IRS Publication 527 (2025)checked 2026-10-18