How to Record Security Deposits in QuickBooks

A security deposit you receive from a tenant is a liability, not income, because you may have to give it back. Set up an Other Current Liability account called Security Deposits Held, record the money you collect into that account (ideally deposited into a separate trust bank account), and leave it there. You only move it to income or refund it at move-out, once you know how much the tenant gets back. A deposit you pay as a tenant is the mirror image: a refundable asset, not an expense.

Last updated July 2026.

Why a security deposit is a liability, not income

The money a tenant hands you at signing is still the tenant's money. You are holding it against future damage or unpaid rent, and if the unit comes back clean, you owe every dollar of it right back. That obligation to return the funds is exactly what a liability is on a balance sheet, so a received deposit belongs there and not on your profit and loss.

The IRS agrees with this treatment. A security deposit you plan to return is not rental income in the year you receive it. It only becomes income later, and only for the part you actually keep, if you apply some of it to damages or unpaid rent when the tenant leaves. There is one common exception: if the deposit is really a prepaid last month's rent, it is income when you receive it, so record that as rent, not as a liability.

Set up the accounts

You need one liability account, and it helps to have a dedicated bank account too. The liability tracks what you owe tenants; the bank account keeps their cash physically apart from your operating money.

1. Go to your chart of accounts and add an Other Current Liability account named Security Deposits Held.
2. If your state or your own policy requires a separate deposit account, add a Bank type account that mirrors the real trust or escrow account at your bank.
3. Decide how you will track individual tenants. Sub-accounts under the liability show a running balance per tenant on the balance sheet; classes keep the chart shorter but must be applied to every deposit transaction. Pick one and stick with it.
4. Turn off any bank rule that would auto-post deposit money to a rent or income account. That is the mistake this whole setup exists to prevent.

Record a deposit you receive

When the tenant's deposit arrives, record it as a bank deposit and point the other side of the entry at the liability, not at income. The cash goes up and what you owe goes up by the same amount, so your equity does not move. That is correct, because none of it is your money yet.

1. Create a bank deposit into your trust or escrow account (or your regular bank account if you do not keep a separate one).
2. In the Received From field, choose the tenant, and in the account column select Security Deposits Held.
3. If you track tenants with sub-accounts or classes, tag the line to that tenant.
4. Save. The deposit now sits on your balance sheet as a liability, tied to the tenant who paid it.

Hold deposits in a separate account

Many states require landlords to keep tenant deposits in a separate account, and some require it to be an interest-bearing or escrow account with the interest passed on to the tenant. Even where the law does not force it, keeping deposit cash out of your operating checking account is smart. It stops you from accidentally spending money you will have to return.

Mixing deposit funds with operating funds is called commingling, and in states that regulate deposits it can cost a landlord the right to keep any of the money, sometimes with penalties on top. Check your own state's rules for the deadline to return a deposit, whether interest is owed, and what account the funds must sit in. In QuickBooks, the separate Bank account you set up should mirror that real trust or escrow account one to one, so a reconciliation proves the cash you are holding matches the deposits you owe.

Apply or refund the deposit at move-out

Move-out is the only time the deposit stops being a simple liability. Once you inspect the unit and settle the final rent, you land in one of two situations.

Full refund. If there is no damage and no unpaid rent, you give it all back. Write a check or send the payment from the trust account and post it against Security Deposits Held for that tenant. Both the bank balance and the liability drop by the same amount, and the tenant's balance returns to zero. Nothing touches income, because you never earned any of it.

Keep part of it. If you withhold money for damage or unpaid rent, that withheld portion is now income to you, so it moves off the liability. Record the kept amount as a reduction of Security Deposits Held and a credit to rental income (or, if you prefer to net it against the cost of the fix, to the repairs account you are charging). Refund whatever is left to the tenant out of the trust account. If a tenant's $1,500 deposit covers $400 of carpet repair, you move $400 to income and send the tenant the remaining $1,100.

When you actually pay a contractor for that carpet or paint, book it as a normal repairs expense from your operating account; for larger portfolios, teams often automate the vendor payments behind those repairs so the bills, approvals, and checks are handled in one place. Keeping the repair expense and the retained deposit as separate entries also gives you a clean paper trail if the tenant disputes the deduction.

Recording a deposit you PAY as a tenant

Now flip sides. If your business pays a deposit on a leased office, storefront, or piece of equipment, that money is not gone, it is refundable, so it is an asset to you, not an expense. Do not run it through rent expense.

Create an asset account, often named Security Deposits or Security Deposit Receivable, and record the payment there. If you expect the deposit back within a year, classify it as an Other Current Asset; if the lease runs longer, an Other Asset (long term) is the better fit. When the lease ends and the landlord returns your money, record the refund as a deposit into your bank and clear the asset account. If the landlord keeps part of it, move that portion to an expense at that point, since that is when it stops being refundable.

Reconcile the account

Whether you hold deposits or pay them, reconcile the accounts against the real bank statement. For a trust or escrow account, the reconciled bank balance should equal the Security Deposits Held liability at the same date; if they drift apart, a deposit hit one account but not the other. To make the bank side quick, you can convert the trust account's PDF statement to a .qbo file and import it so the cleared items line up against your register without hand keying. Property managers juggling several buildings can follow our workflow for bank statements to QuickBooks for property management, then import into QuickBooks Online in a few clicks.

Frequently asked questions

Is a security deposit income or a liability?

A security deposit you receive is a liability, not income, as long as you may have to return it. It sits on your balance sheet as money you owe the tenant. It only becomes income if you keep part of it at move-out for damages or unpaid rent, or if it was really prepaid last month's rent.

How do I record a security deposit in QuickBooks?

Record it as a bank deposit and post the offset to an Other Current Liability account called Security Deposits Held, tagged to the tenant. Do not post it to income. Ideally deposit the cash into a separate trust or escrow bank account so tenant funds stay apart from your operating money.

How do I record a refunded security deposit in QuickBooks?

Pay the tenant from the account holding the deposit and post the payment against Security Deposits Held for that tenant. Both the bank balance and the liability drop by the refund amount, and the tenant's balance returns to zero. A full refund never touches income, since you never earned the money.

Where does a security deposit go on the balance sheet?

A deposit you received goes under liabilities, usually as an Other Current Liability named Security Deposits Held. A deposit you paid as a tenant goes under assets, as a current asset if you expect it back within a year or a long-term asset if the lease runs longer. Neither one belongs on the income statement.

How do I record a security deposit I paid?

Record it to an asset account, not to rent expense, because the money is refundable. Create a Security Deposits asset account and post the payment there, current if you expect it back within a year, long term otherwise. Clear the asset when the deposit is returned, and expense only any portion the landlord keeps.

Handled this way, security deposits stay off your income statement until they are truly earned, your balance sheet shows exactly what you owe tenants or are owed by a landlord, and a clean reconciliation backs it all up. Set up the accounts once, record every deposit the same way, and move money to income only at move-out.