You can actually do it either way, and it does depend on how the security deposit is handled. For me, security deposits I receive go into a non-interest bearing account, that for the life of me I can't recal what you call that type of account. There are only two ways to get that money out of the account.
- When the renter moves out, I refund it to them out of my existing funds and provide proof I did so. The bank then releases the funds to me. Otherwise, the bank will cut the check payable to the tenant and mail that check to the last known address of the tenant, when either I or the vacating tenant provide the bank the "Termination of Lease" notice.
- If I have a claim against the deposit, I must go through the process of notifying the tenant of my claim within 15 days after the end of the lease, or the tenant vacates the property - whichever is last. The tenant has 30 days to challenge my claim. If not challenged then the bank will cut me a check for the amount of my claim. If my claim is not for the entire deposit, the bank cuts a 2nd check for the difference and sends it to the vacated tenant at their last known address.
Now when I place claim on a deposit I do have to include it as rental income. But that's okay, since I will be offsetting the taxability of that income with the repairs/damages I am using that money to pay for. So in the end, it's a wash.
