Investors & landlords
IRS Publication 527 Residential Rental Property, page 4, states:
Security deposits
Do not include a security deposit in your income when you receive it if you plan to return it to your tenant at the end of the lease. But if you keep part or all of the security deposit during any year because your tenant does not live up to the terms of the lease, include the amount you keep in your income in that year.
If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. Include it in your income when you receive it.
As an example, if an IRS form 1099-K reports $5,000 with the following detail:
Rental Deposit
Rental 1 $1,000 $1,000
Rental 2 $1,500 $1,500
and you will report the deposit amount as a deposit and not as income, report the rental income of $1,000 for Rental 1 and $1,500 for Rental 2.
Maintain a separate record of the $1,000 and $1,500 deposit amounts should a tax authority have a question about these amounts at a later time.
You may report the full $5,000 across the two rental properties and deduct the security deposit for each property in the Other Expenses section for that property.
This method would maintain a record within the tax return of the transaction.
