In a nutshell;
All income received for rental property for any reason from any source is reported as rental income. Period. What you enter on the tax return has to match or exceed the total of all tax reporting documents received for that income. If the tax reporting document you received included the tenant's refundable deposit, then you can go ahead and report it as rental income. Then you can report the deposit as an expense in the expenses section, in the miscellaneous expense section. Just label it something like "Tenants deposit placed in escrow". That way, you don't get taxed on that deposit.
If at the end of the lease or when the tenant vacates, if you refund the deposit you have nothing to report. Howver, if you lay claim to all or any part of that deposit, then it must be included in the rental income.
