How to record security deposits the right way
5 min read
Security deposits trip up more landlord books than almost anything else, because the instinct — treat the money as rental income when it lands — is exactly wrong. A deposit is a liability: the tenant's money that you're holding and will most likely give back. Record it that way and everything downstream stays clean.
A deposit is a liability, not income
When a tenant pays a security deposit, your cash goes up and so does what you owe them. In accounting terms you debit a bank/cash account and credit a liability account like 'Security deposits held.' It never touches your income or your P&L.
Book it as income by mistake and you'll overstate profit, overpay tax, and misstate what you owe tenants — a mess to unwind later.
Hold it where your state requires
Many states require deposits to be kept in a separate trust or escrow account, sometimes an interest-bearing one, and to be returned within a set number of days after move-out. Commingling deposits with operating cash is a common and costly compliance mistake.
Keeping deposits in their own account also makes your books mirror reality: the liability on paper matches real money set aside.
When you return it
At move-out, returning the full deposit simply reverses the original entry: you reduce cash and reduce the 'Security deposits held' liability. No income, no expense — the money was always the tenant's.
Track deposits per lease so you always know exactly how much you're holding for each tenant and can return the right amount on time.
When you keep part of it
If you withhold from a deposit for unpaid rent or damages, that's when income or a cost recovery appears. The withheld portion for unpaid rent becomes rental income; amounts applied to repairs offset the repair expense. The rest still goes back to the tenant.
Document the deductions with an itemized statement — most states require one — and keep the receipts. Clean records here are what protect you if a tenant disputes the withholding.
Let the system keep it straight
Doing this by hand across many leases is where errors creep in. Rentwelly records deposits to a liability account, tracks the balance held per lease, and handles the move-out return or withholding with the correct double-entry — so your 'deposits held' figure is always accurate and audit-ready.
The result: your balance sheet shows exactly what you owe tenants, your income isn't inflated by money that isn't yours, and returns happen on time.
See it in your own books
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