First of all, security deposit is a refundable amount. So, it is not allowed as a tax deductible. Even if it is not returned to you by your landlord, it is still not a deductible. The tax laws always assume that it is a refundable amount, and therefore, it cannot be considered for tax deduction.
Only an expense which is unavoidable in nature is considered as a deductible. In order to qualify as a deductible, the landlord can use things like depreciation, repair expense, local traveling costs to collect rent, for rent and mortgage interest. Therefore, a security deposit is not tax deductible for the landlord or the tenant in any way. This law is universal across all the states of the United States.
Secondly, when a landlord takes a security deposit, he either invests it or puts it in a bank. If he has ensured that the deposit earns interest, then the landlord also needs to return the interest accrued by the deposit.
These are some rules related to the security deposit. The landlord is not allowed to generate an income like interest using your money as the capital. It is clearly mentioned in the agreement that the amount is being given as a deposit against the property.
However, if the landlord does not return the security deposit to the tenant, he is legally bound to report this amount in his income tax return. And any amount of the security deposit used to conduct repairs in the house can be claimed as a deductible expense by the landlord.
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