Overview
If you're ending a lease and plan on keeping the security deposit or any other deposit due to damages, cleaning, a broken lease contract, or similar reasons, you'll want to withhold the deposit to pay off outstanding lease charges.
To withhold a deposit means you, as the property manager or owner, decide not to return the money that was originally paid as a deposit back to the tenant. This often happens when the terms of the lease agreement weren't fulfilled — a dispute, unpaid rent, damages, and so on. You can also withhold a deposit for something like a last month's rent deposit that you're applying to the end of a lease. Essentially, you're transferring money from the deposit to pay off what's owed on the lease.
When you withhold a lease deposit, the money applies as a credit to the tenant's lease balance. If there are outstanding charges on the lease, the credit pays those off and the deposit becomes revenue. If there's no outstanding charge, the withheld deposit exists as an unapplied credit until you add a lease charge — it's recommended to create the lease charge first, before withholding the deposit.
You can also withhold deposits as part of the Ending a Lease wizard.
Note: You can only withhold a deposit that has been fully recorded. If the deposit doesn't appear on the lease's Deposits tab, the original payment hasn't been recorded yet — see Why Doesn't My Security Deposit Show on the Lease, Statement, or Deposits Tab? before continuing.
The Steps
Step 1: Post a Charge on the Lease (If There Isn't One)
Before you can withhold a deposit, make sure there's an open charge on the lease for the deposit to apply to. This needs to be a revenue charge, such as unpaid rent, maintenance, or an early termination fee. If there's no open charge, post one using a revenue account category (for example, Revenue > Cleaning or Revenue > Maintenance).
For a refresher on posting a charge, see Post a One-Time Charge on a Lease.
Step 2: Withhold the Lease Deposit
To withhold a deposit on a lease, click Leasing > Leases on the main menu.
Find and click on the lease you want to withhold a deposit for.
On the lease, click the Transactions tab. If there are already charges on the lease with a past-due balance, you can skip this step. Otherwise, click Post Charge and create a charge for a revenue category — such as Cleaning, Maintenance, or Lease Termination — showing why you're withholding the deposit.
Next, click on the Deposits tab and then the Withhold Deposit button.
Enter the following information:
Description: Enter an optional explanation for the withholding.
Amount to Withhold: Enter the amount of the deposit to withhold. If there's more than one lease deposit, you can withhold from multiple deposits, or enter $0.00 for the deposits you don't want to withhold from.
Due Date: Change the date for the withholding if needed.
Add Memo: Add an optional note for your reference when reviewing the withholding later.
Add any relevant files and click Save.
Withholding the deposit converts the money from a liability on your balance sheet to income shown on your Profit and Loss report — it no longer shows up as a deposit held, and instead appears as revenue you can distribute to your owner.
Once withheld, you can refund what's left of the deposit back to the tenant, then end the lease once all the financials are sorted out.
Note: Withholding a deposit moves the funds from the deposit liability account to an income or expense-recovery account — converting an obligation you owed the tenant into recognized revenue. If the liability isn't decreasing after withholding, the workflow may not have been used correctly — see Security Deposits on the Balance Sheet: Where They Appear and How to Fix Doubled or Inverted Balances.
Things to Consider
If you were holding the deposit in a separate bank account, such as an escrow account, you'll need to record what happens to the deposit in real life. For example, if you withheld the deposit and applied it to a revenue account like rent, you'll need to do a bank transfer from escrow to your operating account, mirroring what actually happened.
If you're holding a "rent credit" in deposits as a liability, you can use the Withhold Deposit option to apply it to any open charges.
Don't forget you'll still need to record an expense if you're withholding a deposit for anything not rent-related — for example, create an expense for repairs if you're withholding for damages.