Refundable security deposits are included in almost every lease. However, since they are neither income nor expenses, many landlords are confused where they belong when filing taxes or miscategorize these funds when keeping their books. Below are some of the most frequently asked questions about how to properly account for your security deposits.
Is a security deposit rental income?
No. A refundable security deposit that you receive from a tenant is not rental income.
You refund money paid as a security deposit at the end of the lease provided that the terms of the lease are met. Therefore, the money remains your tenant’s, and you are holding that money in trust for your tenant until you either refund it or retain it at the conclusion of the lease. If you do retain some or all of a tenant’s security deposit at the end of the lease the retained funds become rental income at that time.
Is returning a security deposit an expense?
No. Returning a refundable security deposit that you previously received from a tenant is not an expense.
You refund money paid as a security deposit at the end of the lease provided that the terms of the lease are met. Therefore, money paid as a security deposit is neither income when it is received nor an expense when it is refunded. Instead, the money legally remains the tenant’s funds throughout the time that you hold the deposit.
Do I report a security deposit on the Schedule E?
Refundable security deposits are not reported on Schedule E as either rental income or expenses when they are received from or returned to your tenants.
If you do have to retain some or all of a tenant’s security deposit, it becomes income at that point in time. The retained funds should be reported on the ‘Rental Income’ line of that year’s Schedule E. Any expenses that you pay using the retained funds should also be reported on the Schedule E under the appropriate category in the year that you pay them.
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