Is a security deposit income for a landlord?

Not when you receive it, if you plan to return it. The IRS says the part you keep becomes income in the year you keep it.

Is last month's rent collected at move-in taxable?

Yes. Publication 527 treats a payment to be used as the final month's rent as advance rent, included in income in the year you receive it.

What account do security deposits go in?

A liability account, often called Security deposits held. Its balance should equal the list of deposits by unit.

Security Deposit Accounting for Landlords

A security deposit you expect to give back is money you owe the tenant, so it belongs in a liability account, not in income. The IRS says not to include it in income when you receive it, and to include any part you keep in the year you keep it. A deposit the lease says will be used as the final month's rent is different: the IRS treats it as advance rent, taxable when received.

What the IRS says

Publication 527 covers three cases:

Case	Tax treatment
Deposit you plan to return at the end of the lease	Not income when you receive it
Part of the deposit you keep because the tenant broke the lease terms	Income in the year you keep it
Deposit that is to be used as the tenant's final rent payment	Advance rent: income in the year you receive it

Your books should follow the same three cases. Read your lease: if it calls a payment a "security deposit" but also says it will be applied to the last month, ask your tax preparer which case it falls into.

The entries, one by one

Each entry below lists the accounts that go up or down. In bookkeeping terms, a debit increases an asset and decreases a liability; a credit does the opposite, and increases income.

1. Receiving the deposit

Example a made-up tenant in unit 3A pays a $1,500 deposit at move-in. Debit Cash (or the deposit bank account) $1,500. Credit Security deposits held $1,500. Income does not change.

2. Returning it in full

Example the same made-up tenant moves out with no damage. Debit Security deposits held $1,500. Credit Cash $1,500. Income and expense do not change.

3. Keeping part for damage

Example instead, the made-up tenant leaves $420 of damage and the owner keeps that amount under the lease. Debit Security deposits held $1,500. Credit Cash $1,080 (returned to the tenant). Credit Deposits kept, an income account, $420. When the owner pays $420 to repaint and patch, that is a separate entry: Debit Repairs $420, Credit Cash $420. Income of $420 and a repair expense of $420 both show on the property's P&L.

4. Keeping part for unpaid rent

Example a made-up tenant leaves owing $700 of rent that was already charged and recorded as rent income. Under the cash method that $700 was never received, so it was never income. Applying the deposit: Debit Security deposits held $1,500, Credit Rent income $700 (now received), Credit Cash $800 returned. Under the accrual method, where the $700 was recorded as income and a receivable when it was charged, the credit goes to Rent receivable instead, so income is not counted twice.

5. A deposit set aside as last month's rent

Example a made-up lease requires $1,500 of last month's rent at signing. Publication 527 treats that as advance rent. Debit Cash $1,500, Credit Rent income $1,500 in the year received, even if the last month is next year. Some owners also track it in a memo list so it is not charged again at the end.

State rules on where the money sits

Federal tax rules say when a deposit is income. State law says how you must hold it, how much you can collect and how fast you return it. Two examples, from the statutes themselves:

State	What the statute requires	Source
Massachusetts	Hold the deposit in a separate, interest-bearing account in a bank in Massachusetts, not mixed with the landlord's assets; deposit no more than the first month's rent; pay interest at 5% a year or what the bank paid if lower, at the end of each year of tenancy; return the deposit or balance within 30 days after the tenancy ends	M.G.L. c. 186, § 15B
New York	Hold the deposit in trust and do not mix it with personal money; for buildings with six or more units, keep it in an interest-bearing account at a bank with a place of business in New York; the interest belongs to the tenant, less a 1% yearly administration fee the landlord may keep	N.Y. General Obligations Law § 7-103

Read Massachusetts General Laws chapter 186, section 15B and New York General Obligations Law section 7-103 for the full text. Other states have their own rules, so check your state's statute and ask your attorney.

Interest that belongs to the tenant is also a liability in your books until it is paid. Record it as owed to the tenant, not as your income.

The monthly check that catches mistakes

Once a month, compare three numbers for each property. They should agree.

The balance of Security deposits held in the books.
The sum of the deposit list by unit, from your leases.
The deposit bank account balance, if you keep one, minus any interest owed to the tenant that is still in it.

Example a made-up 12 unit building lists deposits of $1,200 for eight units and $1,400 for four, a total of $9,600 plus $5,600, or $15,200. The books show Security deposits held of $16,400. The $1,200 gap is one deposit: unit 2B moved out last month and was paid back, but the return was booked as a repair expense instead of reducing the liability. Moving that $1,200 entry to Security deposits held fixes both the liability and the inflated repairs line.

Common deposit mistakes

Booking deposits as rent income, which overstates income and can overstate tax.
Booking a returned deposit as an expense, which understates profit.
Spending deposit money on operations in a state that requires it to be held apart.
Losing track of deposits when a building is bought or sold; the deposits often pass to the buyer, so the deposit list should be part of closing.

How DoorKeeping handles it

In DoorKeeping, each property's books track deposits held separately from income, so the liability and the list by unit are always in view. You can ask your AI app what deposits a building holds, or what a move-out entry should look like, and any money movement waits for your one-tap approval. DoorKeeping gives no legal or tax advice, so check your state's rules with your attorney.

Sources

IRS, Publication 527, Residential Rental Property (2025), read Oct 29, 2026
Massachusetts General Laws, chapter 186, section 15B, read Oct 29, 2026
New York General Obligations Law, section 7-103, read Oct 29, 2026

Questions

Is a security deposit income for a landlord?: Not when you receive it, if you plan to return it. The IRS says the part you keep becomes income in the year you keep it.
Is last month's rent collected at move-in taxable?: Yes. Publication 527 treats a payment to be used as the final month's rent as advance rent, included in income in the year you receive it.
What account do security deposits go in?: A liability account, often called Security deposits held. Its balance should equal the list of deposits by unit.