Background The transition in the population pyramid is a reality in several locations around the world and projections of an increase in the older population in Brazil demonstrate the relevance of studies on factors that may interfere in the functionality and quality of life in this age group. Thus, the present study aims to assess depression levels and their relationship with sleep quality in institutionalized and community older adults. Methods This cross-sectional study included 220 older people of both sexes, divided into two groups, institutionalized older adults, and community older adults. The older adults were monitored by Community Health Agents (CHA), through identification of everyone in their micro area using a method of random name generation, based on geographic location. Due to the small number of institutionalized older adults, all residents in the institutions were recruited, according to the inclusion and exclusion criteria. The Geriatric Depression Scale (GDS-15) and Pittsburgh Sleep Quality Index (PSQI) were used to assess depression and sleep quality. Results Among the 220 older adults, 175 were community members and 45 were institutionalized. The survey revealed that institutionalized older adults had a higher percentage of severe depression compared to community dwelling older adults (p <  0.039). Conclusion Older adults in the community present greater symptoms of depression and better sleep than institutionalized older adults. There was a direct association between sleep quality and depression. In our sample, being institutionalized and female positively influenced and feeling alone negatively influenced depressive symptoms.