A security deposit that the landlord intends to return is generally treated differently from rent received in advance. If an amount described as a deposit is intended to cover the final month's rent, the tax analysis follows its actual purpose.

When a landlord retains a deposit because the tenant does not meet the lease terms, the amount retained may become income. A repair payment and the related expense should be supported and classified rather than simply netted without explanation.

Use separate bookkeeping categories for rent, refundable deposits, retained deposits, and expenses. Preserve the lease, refund records, and documentation of deductions from the deposit. This also makes the property's financial results easier to understand.

Your next steps

• Read the deposit and advance-rent clauses in the lease.
• Reconcile deposits received, returned, and retained.
• Keep tenant statements and repair support.

General education, not individualized tax or legal advice. Illustrations use stated assumptions and do not promise a refund or tax saving.