A security deposit is generally not included in rental income, because that money is still the tenant's money. The landlord just holds it in escrow.
In many states there's legal requirements for dealing with a security deposit. How it's treated in your state depends on the laws of that state. Typically, a security deposit is not your money. That money belongs to the tenant. The landlord holds the security deposit in escrow.
When a tenant vacates the landlord is required to provide the tenant a "dissolution of deposit" usually in the form of a letter along with any deposit amount being returned, if any is being returned. The letter states what amounts (if any) are being withheld from the deposit, and why or what those withheld amounts are for. Generally, such dissolution has to be accomplished within a set period of time after the tenant vacates. Here in FL, it's 15 days.
From there, the tenant has 30 days to dispute any disagreement with the dissolution. If things can't be settled between the landlord and tenant, then either party can take it to small claims court. Usually it gets settled in small claims with no further recourse.
@Carl wrote:When a tenant vacates the landlord is required to provide the tenant a "dissolution of deposit" usually in the form of a letter along with any deposit amount being returned, if any is being returned. The letter states what amounts (if any) are being withheld from the deposit, and why or what those withheld amounts are for. Generally, such dissolution has to be accomplished within a set period of time after the tenant vacates. Here in FL, it's 15 days.
The law in FL can be found at the link below.
There's no such term as "dissolution of deposit" and if the landlord is returning the entire security deposit, no statement needs to be provided.