Is a rental security deposit taxable?

The rule

Publication 527 handles security deposits under the types of rental income. You do not include a security deposit in income when you receive it if you plan to return it to your tenant at the end of the lease. If you keep part or all of it during any year because your tenant does not live up to the terms of the lease, you include the amount you keep in your income in that year. The test is your intention and what actually happens, not the label on the receipt.

The logic follows the cash method that most individual landlords use: you report income in the year you actually or constructively receive it, but money you hold as a refundable deposit is not yet yours. It becomes yours when you keep it.

The label trap: last month's rent

If an amount called a security deposit is to be used as a final payment of rent, the publication says it is advance rent, and you include it in income when you receive it. Advance rent is any amount received before the period it covers, and you include it in the year you receive it regardless of the period covered or your accounting method. The publication's example is a 10-year lease signed March 18, 2025 where you receive $9,600 for the first year's rent and $9,600 for the last year's rent in 2025. You include $19,200 in 2025 rental income.

This is why the calculator above asks how the money will be used. A $1,500 deposit you will refund is $0 of income today; a $1,500 payment you will apply to the last month is $1,500 of income today.

When you keep part of the deposit

Suppose a tenant leaves $2,000 of damage and unpaid utilities and you keep $900 of a $1,800 deposit in 2025. Under the publication's rule you include $900 in 2025 income. The other $900, refunded, never was income. If the money you keep pays for repairs, remember that the repair is itself a rental expense you may deduct if it is deductible; see repair or improvement for rental property. Keeping a deposit does not cancel the separate need to decide whether the cost is a repair or an improvement.

Other payments that are rent

The same section of the publication lists payments that surprise landlords. If your tenant pays you to cancel a lease, the amount you receive is rent and is included in the year received regardless of accounting method. If your tenant pays any of your expenses, those payments are rental income, and you can also deduct them if they are deductible rental expenses. In its examples, a tenant who pays a water and sewage bill the lease did not require, or pays for a furnace repair and deducts it from rent, produces income to you equal to the bill, with an offsetting deduction.

If you receive property or services instead of money, include the fair market value in rental income. If the services are provided at an agreed price, that price is the fair market value unless there is evidence to the contrary. The publication's example is a painter who paints your rental in place of 2 months of rent: you include 2 months of rent in income and deduct the same amount as a rental expense for painting.

Options to buy, shared ownership and short rentals

Payments under a lease with an option to buy are generally rental income. If your tenant exercises the option, payments for the period after the date of sale are treated as part of the selling price. If you own a part interest, you report your share of the income. If you rent property that you also use as your home for less than 15 days during the year, you do not include the rent in income; see the 14-day rule.

Rental income is reported on Schedule E, Part I. Estimated tax may be due on net income, so see the quarterly estimated tax calculator, and for depreciation against that income use the rental property depreciation calculator.

Sources

• IRS Publication 527, Residential Rental Property (2025): Rental Income (When To Report, Types of Income: Advance rent, Canceling a lease, Expenses paid by tenant, Property or services, Security deposits). Read November 2, 2026.

Edition read: Publication 527 (2025), for use in preparing 2025 returns. Dollar limits and rates in this publication are for 2025; check the current publication and form instructions for your tax year. Where a figure is described as our arithmetic, it applies the publication’s rule to a made-up example. This page summarizes the publication and does not replace it.