The security deposit protects landlords from any costs incurred through missed rent payments or excessive damage to the property during a tenancy and simultaneously acts as an incentive for a tenant to look after the property during their residency. For these reasons, almost every landlord collects a deposit before the tenant moves in.
However, the way that you have to treat and manage a security deposit varies from state to state with each state stipulating specifics on everything from how much the security deposits can be and how you need to store it, to when you need to return the security deposit and what you can and can’t deduct from it.
As such, landlords need to make sure they research their state-specific laws and regulations regarding the treatment of security deposits. Additionally, they should implement a proper system for accounting for the security deposit once it has been collected so that they can provide evidence if needed that the proper amount was returned to the tenant in good time.
As a general rule of thumb, landlords can deduct the following from a security deposit at the end of a tenancy.
If a tenant still owes rent after they leave the rental property, then you may be able to deduct the amount outstanding from the security deposit.
Small and minor damages occur in property all the time just from general living. Carpets will need to be routinely replaced, walls will need to be repainted. Minor things like this are expected costs of owning and running a rental and cannot be deducted from the security deposit.
However, large damages, for example, holes in the walls, broken off cupboard doors or large stains on carpets, damage which would not reasonably occur from general living can be deducted from the security deposit.
In some states, you can use the security deposit to return the property to the same state of cleanliness the property was in when the tenant moved in. If you hire a cleaning company between tenancies, which is often a good way to elongate the life of appliances and carpets, then this may be deductible from the security deposit. Make sure to check your local and state laws.
Again this is not the case in every state. But if a tenant steals property from the rental, such as the keys, you may be able to deduct the cost of a replacement from the deposit. It’s a good idea to stipulate the cost of something like key replacements in the lease to ensure the amount is clearly and legally defined.
If a tenant moves out before the lease agreement has come to an end you might have a clause in your lease agreement that specifies that the tenant will need to pay a fee to break with the contract as a way to cover the potential losses you will face due to an unexpected vacancy. If this is the case, you may be able to deduct that break fee from the security deposit.
Landlords may not withhold money from your security deposit for:
This could be a repair that existed prior to the tenant moving in, or it could be something that has broken due to old age or through regular use. For example, the oven might be old and need parts replacing, or a washer in a tap might give out.
We mentioned this above and go into greater detail below as to what qualifies as normal wear and tear, but expenses that are associated with normal wear and tear cannot be deducted from the security deposit.
Maintaining the cleanliness of your rental is important. However, if your tenant leaves the rental in the same state as when they moved in you can’t then charge them extra cleaning fees.
Any costs that are not associated with the tenant’s occupancy, for example, you decide to change the paint on the cupboard doors after the tenancy ends, or make changes to communal areas. These costs that are not associated with a single tenancy cannot be deducted from a tenant’s security deposit.
Most of these actions wouldn’t be done by an honest landlord, but some landlords out there do take advantage of naive tenants.
Most states will require you to provide an itemized statement listing all the amounts and deductions that you will be making from a security deposit along with the reasons for those deductions.
Even if your state does not determine this is necessary it’s good practice to do so as it provides evidence should your tenant decide to question or contest the deductions in court. This is one of the main reasons you need a quality system to track and account for the security deposit and any deductions made.
The amount of time a landlord has to return a security deposit and any itemized deductions varies from state to state. In California, it is within 21 days that the tenant moves out. In New York, it is within a “reasonable” time that is usually between 30 to 60 days. You can check your state laws regarding returning your security deposit here to ensure you return your tenants’ deposits within the legally defined time frame.
The law does not define normal wear and tear. However, a general rule is that wear and tear consists of the deterioration of the unit that occurs during normal living conditions. What this means is that any damage caused by regular and normal activity, such as cleaning, in the property cannot be deducted from the tenant’s security deposit. An example would be the slow deterioration of the carpet due to people walking on it. Normal wear and tear includes things like worn out or frayed carpet, worn tiles, faded or chipped paint, etc.
Damage, on the other hand, is a result of an accident or unreasonable use of your rental unit. This includes broken windows, large holes in the walls, stains, and excessive build-up of dirt or filth.
Many states will penalize a landlord for improperly holding onto a deposit. For example, if you attempt to charge the tenant for repairs to damages not caused by them.
If this is the case you may be forced to go to small claims court and justify each of the deductions you made to the deposit. This is why having a detailed itemized receipt of all deductions is a good idea. Should the judge find that you improperly held onto funds not only will you be required to return the full deposit, but you also may face a penalty.
Penalty amounts vary by state but can be as much as three times the security deposit amount.
Around half of the states in the US have set limits on the amount that you are allowed to charge as a security deposit. These are state-specific, so be sure to first research what this limit is in the location of your rental. In states with limits, the amount varies widely from between 2 weeks rent to 3 months rent. There might also be additional rules and regulations depending on your municipality.
In those states which don’t have set limits, such as Florida and Texas you still need to take some care to ensure you are setting a fair and useful deposit amount. You don’t for example, want to set it too high and put off prospective tenants, nor do you want to set it so low that it won’t cover potential damages.
The average security deposit amount for a long-term lease is around one month’s rent. Many landlords require the security deposit and first month’s rent (and sometimes last month’s rent too) before move-in.
The security deposit doesn’t belong to the landlord. Landlords are able to make deductions from the security deposit after the tenancy to cover financial loss caused by the tenant in the form of owed rent or property damage. To make the deductions legally most states requires an itemized bill of repairs and deductions. This is another reason landlords need a quality accounting solution for their rentals.
Bad security deposit accounting can result in a number of problems from being unable to make deductions, meaning repairs will come out of your pocket, to facing lawsuits from tenants. This could be especially problematic should you be unfortunate enough to need to begin the eviction process.
Thankfully, there are plenty of property management solutions on the market, for example, Landlord Studio which offers tailored accounting for landlords to help them keep track of all of their finances in one handy place.
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Ben is an author and real estate enthusiast. His interest in all things entrepreneurial has led him to work with real estate professionals all over the world, distilling their knowledge into articles and Ebooks.
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