The security deposit if $1050 because the seller settled the discrepancy out of his or her own pocket instead of bothering the tenant with it. It doesn't not matter who paid it. It was earmarked in legal documents as security deposit. If it is not counted as that, then it would be considered income and you would have to report it on your tax forms.
Closing on a property is tiresome. There are a lot of papers to sign. On top of that you had an infant, which is can also consume much rest. However, that wouldn't be a defense. It's definitely an explanation but not a defense.