Legal Question in Real Estate Law in California

This is a matter of contract. Most leases and rental agreements are written to say that you have to maintain the depoit throughout the rental, and you have to pay the rent at a certain time every month. These terms are in turn generally interpreted by the courts to preclude early draw-down of the deposit. An occasional exception is found where the terms can be interpeted to allow, or even to specify, use of the deposit toward the last month's rent.

In some cases, the landlord might give an OK to this, if asked, even though not specifically permitted.

Calling it "illegal" is a bit strong; At worst, it is a breach of contract.