Security Deposit Accounting for Landlords: How to Record Deposits Held, Returned and Kept

Is a security deposit income?

Not while you plan to return it. A deposit is a liability: money held for the tenant and owed back at the end of the lease. It becomes income only if you keep some or all of it.

How a deposit is treated on the tax return is your CPA's call, and IRS Publication 527 is where the IRS covers it for landlords. The books keep the deposit as a liability until it is returned or kept, so the record shows exactly when either happened.

Deposits are one of the places where cash and profit part ways in rental books, alongside loan principal and escrow. The rental property bookkeeping guide explains them.

How do you record a deposit when you receive it?

Record the money in the account it landed in, and a liability for the same amount in security deposits held. Nothing touches income, so the property’s profit does not change.

1. 1Note the tenant, the property, the date and the amount of the deposit.
2. 2Record the money in the account it was paid into, or as held by the manager if the manager collected it.
3. 3Record the same amount in security deposits held, the liability account, tagged to the property.
4. 4Add the deposit to the list of deposits held, so the list and the account agree.

Property 2's tenant paid a $2,450.00 deposit on Oct 12, 2026, before the lease started on Oct 15, 2026. It went into Demo Rentals LLC checking at Sample Credit Union.

Debits show as positive amounts and credits as negative.

What if the property manager holds the deposit?

Record an asset for the deposit in the manager’s trust account and the same liability you would have if you held it. The cash sits with the manager, and the debt to the tenant is still yours.

Property 1's tenant paid a $2,900.00 deposit on Jun 24, 2025. Sample Property Management collected it and holds it in its trust account. It never reached Demo Rentals LLC checking.

The manager's monthly statement shows the deposit it holds. Checking that balance is one step of reconciling a property management owner statement.

How do you record a deposit you return?

Take the liability off and record the money leaving. Security deposits held goes down by the deposit and checking goes down by the same amount. Nothing touches income or costs.

Here is a what-if, not an event in the sample books: Property 2's tenant moves out and the whole $2,450.00 goes back.

WHAT-IF, INVENTED DATA

How do you record a deposit you keep?

Split it. The part you return comes off the liability and the bank. The part you keep moves from the liability to income in the year you keep it. Its cost is recorded separately.

The kept amount is dated in the books, with the lease term it was kept under. How it is reported is your CPA's call, made from that record.

The same what-if, with a different ending: $300.00 is kept for cleaning under the lease, and $2,150.00 goes back to the tenant.

WHAT-IF, INVENTED DATA

The cleaning bill is recorded as a cost of Property 2 when it is paid, on its own line.

What about a deposit used as the last month’s rent?

Then it is rent paid early, not a deposit. Money the lease says will pay the final month is recorded as rent when it arrives, not held for the tenant. Your CPA decides the year it is reported in.

When the lease says the deposit will pay the final month, the money is rent paid in advance, so it is recorded as rent and not held for the tenant. The year it is reported in is your CPA's call. So the lease wording decides which account the money goes to on day one.

Neither sample lease does this. Both deposits at Demo Rentals LLC are held as deposits.

How do you keep track of every deposit you hold?

Keep a list of every deposit by property and tenant, and check each month that its total equals the security deposits held account. The total moves only when a deposit arrives, goes back or is kept.

Property 2's deposit arrived on Oct 12, 2026. The what-ifs above are not in this table.

The $2,450.00 raised Demo Rentals LLC's bank balance in October and its profit not at all. That is one reason behind the gap in cash flow vs profit in real estate bookkeeping.

State and local rules set how a deposit may be held, when it must go back and how deductions are listed. Those are legal questions for your attorney. The books record what actually happened.