A refundable security deposit is not income when received; it becomes income in the year any part of it is kept. IRS Publication 527: “Don’t 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 doesn’t live up to the terms of the lease, include the amount you keep in your income in that year.” A payment that is really advance rent — a “deposit” the lease applies to the last month — is income when received. Texas law shapes the timing: the deposit is accounted for within 30 days of surrender (Property Code §92.103), so the year the accounting is sent is usually the year any retained amount is income.
The cases
| Situation | Tax treatment | Texas note |
|---|---|---|
| Deposit received, held, refunded in full | Never income | Refund within 30 days of surrender (§92.103) |
| Deposit partly kept for damage | The kept amount is income in the year kept; the repair it pays for is a deductible expense (or a capitalised improvement) | Itemised list required (§92.104) |
| Deposit kept for unpaid rent | Income in the year kept, as rent | §92.104 deduction |
| “Last month’s rent” collected at signing | Advance rent — income when received | Not a security deposit under §92.102 |
| Non-refundable fee (pet fee, cleaning fee) | Income when received | Must be labelled non-refundable in the lease |
| Fee in lieu of a security deposit (§92.111) | Income when received | Landlord must also offer a traditional deposit and give the statutory notice |
| Deposit forfeited when the tenant never moves in | Income in the year forfeited, subject to §92.1031 | Only a cancellation fee or actual costs if the landlord finds a replacement |
The records
- A deposit ledger under §92.106, separate from the rent ledger, showing receipt, refund and any retained amount with the accounting date.
- The itemised deduction list for each retained amount — it is both the Texas accounting and the tax support.
- A year-end line: deposits retained this year, by tenancy, carried to rental income.
Interest and separate accounts
Texas does not require deposits to be held in a separate account or to earn interest for the tenant; if the lease promises interest, pay it as the lease says and treat it as the tenant’s. Whatever the account, the ledger must show the deposits as held for tenants, not as the landlord’s money — §92.103(c) gives the tenant’s claim priority over the landlord’s creditors.
Frequently asked questions
Is a security deposit taxable when received?
No, if it is to be returned; it is income in the year any part is kept because the tenant did not meet the lease terms (IRS Publication 527).
Is “last month’s rent” a deposit?
No — it is advance rent, income in the year received, and not a security deposit under Texas Property Code §92.102 (IRS Publication 527, Property Code §92.102).
Must Texas deposits earn interest?
No statute requires it; if the lease promises interest, pay it as promised. The tenant’s claim to the deposit has priority over the landlord’s creditors (Property Code §92.103(c)).
Sources
Rules change and the right answer can depend on the home, the city, the lease and the timing. These are the official pages this guide relies on; check them before signing, charging a fee, sending a notice or making a legal decision.
- IRS Publication 527 (2025) — Residential Rental Property ↗
- Texas Property Code, Chapter 92 — Residential Tenancies ↗
- Texas State Law Library — Security deposits ↗
General information for U.S. landlords, with a Texas focus. This guide is not legal, tax or accounting advice. Consult a qualified professional for your situation. Written by the rentalfreelease.com Editorial Team; last reviewed September 19, 2026.