When entering into almost any lease, a tenant has to pay a security deposit upfront to the landlord. What exactly is a security deposit and how does it function within the context of most lease agreements and the tax code? Let's find out.

What is a 'Security Deposit'?

Simply put, it's a monetary deposit given to a landlord as proof of intent. Security deposits can be either refundable, nonrefundable or partially refundable, depending on the terms of the lease. As the name implies, the deposit is intended to be a measure of security for the landlord in case anything were to happen to the property during the tenant's stay. 

Landlords generally apply security deposits as rent from tenants who cannot otherwise pay or use them to repair damage caused by tenants.

Security deposits are not considered taxable income and cannot be deducted as such. Local laws often treat security deposits as trust funds. Security deposits that are used as final rent payments must be claimed as advance rent and are taxable when paid.

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