Early detection of patients with late-life depression (LLD) with a high risk of developing dementia contributes to early intervention. Odor identification (OI) dysfunction serves as a marker for predicting dementia, but whether OI dysfunction increases the risk of dementia in LLD patients remains unclear. The present study aimed to explore the interactive effect of LLD and OI dysfunction on the risk of dementia and its underlying neuroimaging changes. One hundred and fifty-seven LLD patients and 101 normal controls were recruited, and data on their OI, cognition, activity of daily living (ADL), and resting-state functional magnetic resonance imaging were collected. Two × two factorial analyses were used to analyze the interactive effects of LLD and OI dysfunction on neuropsychological and neuroimaging abnormalities. Mediation analyses were used to explore whether abnormalities detected by neuroimaging mediated the the associations between OI and cognition/ADL. The results suggested that LLD and OI dysfunction exhibited additive effects on reduced ADL, global cognition and memory scores, as well as neuroimaging variables including (i) increased fractional amplitude of low-frequency fluctuation (fALFF) in the right orbitofrontal cortex and right precentral cortex, and (ii) increased regional homogeneity (ReHo) in the left hippocampus/fusiform gyrus, etc. In addition, these increased fALFF and ReHo values were associated with reduced neuropsychological scores (ADL, global cognition, memory, and language). Moreover, ReHo of the left hippocampus/fusiform gyrus completely mediated the relationship between OI and ADL, and partially mediated the relationship between OI and global cognition. Overall, mediated by the hypersynchronization of the left hippocampus/fusiform gyrus, OI dysfunction may increase the risk of dementia in LLD patients.