No, you should not report the security deposit as income, because it really isn't income, since it is not money available to you to use. Also, as you mentioned, you may have to give back part or some of it once the lease ends. Additionally,
- "If you intend to return the full deposit to your tenant after the lease expires, don't report it as income.
- Likewise, if you already refunded the entire security deposit to your tenant, you can't deduct it because it wasn't income in the first place.
- If you kept the deposit (all or part) because your tenant vacated the property before the lease expired, the portion you kept is reported as income.
- If you kept the deposit (all or part) because your tenant damaged the property and your business practice is to:
- Deduct repair costs as expenses, the portion you kept is reported as income.
- Not deduct repair costs as expenses and report the portion that wasn't used to pay for repairs as income.
- Finally, if the security deposit is intended to cover your tenant's final rent payment, it's considered advance rent and should be reported as income when you received it, not when it gets applied to your tenant's final rent payment."
