Security Deposits: Tax Implications for Landlords & Tenants

Security deposits are assets or liabilities, so you cannot deduct them as expenses as a tenant and you need not declare them as income on income tax returns as a landlord until you use them. However, depending on whether you are the tenant or the landlord, interest paid on the deposits may be deducted as an expense or may need to be declared as income.

Rent Deposits are Tenant Assets

If you are a tenant, the security deposit you give the landlord is your money and you can list it as an asset. The landlord should hold it in escrow to be returned or applied to the cost of repairing damages or unpaid rent when you leave the rental property. Typically, you cannot deduct rent deposits as expenses until used, all or in part, to pay rent or damages and only then if allowed as a business expense, as an example. However, the interest you make on the deposit is potentially taxable income and you should declare it as other interest earned on your tax return.

Landlords Hold Deposits in Escrow

Landlords should hold security deposits in an escrow account as liabilities and not as assets. It is not their money unless it is needed to restore the rental property after damages or to apply to unpaid rent. Landlords with over a certain number of rental units are obligated in most locales to pay interest on the deposits to tenants each year. Such paid interest is usually tax deductible as an expense. When all or part of the security deposit is taken for rent or repairs, it becomes income to the landlord.