A. The security deposit that you receive when a new tenant moves into your investment property should not be considered as taxable income. Likewise, when a tenant leaves and you repay the security deposit to them this is not considered to be a tax deductible expense.
If, for any reason, you decide to withhold all or part of the security deposit when the tenant leaves then whatever amount that you withhold becomes taxable income in that year. However, deposits are only usually withheld when there is damage to the property so any expenses associated with repairing this damage will be allowable as an expense against this income.
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