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Portfolio Growth, Rental Accounting

What Landlords Need to Know About Security Deposit Accounting

The security deposit is a refundable deposit tenant’s give landlords before moving into a property. Proper security deposit accounting is vital, giving landlords protection from potential damages as well as offering an incentive for tenants to take care of the property. It is also a way for landlords to protect themselves financially should the tenant stop paying or attempt to skip rent.

While not every landlord does require a deposit it is recommended that you collect one before allowing the tenant to move in.

Every state, and some cities, have different laws around deposits so it is vital that landlords research their state-specific laws before collecting a deposit to ensure they are within their rights and the bounds of the law.

State policy varies specifically around the following factors:

  • The amount you can charge for a security deposit.
  • What you are allowed to deduct from a security deposit.
  • How quickly you must return the security deposit once the tenant vacates.
  • Whether you have to return interest earnings with eth deposit.
  • If unpaid rent can be taken from a security deposit.
  • Requirements around how accounts are set up to track security deposits.

Because of the above having a system in place to accurately account for the security deposit is important for landlords. We go into more detail about how you can do this through Landlord Studio below.

Read: California Landlord Tenant Laws

Read: New Jersey Landlord Tenant Laws

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Why you Should Never Comingle Security Deposit and Personal Funds

You have to remember you are holding the deposit in trust for your tenants. It’s an insurance policy during the tenancy and should not be confused as an additional income source or rent.

A landlord must hold onto the deposit until they return it at the end of the lease. Because of this, it’s good practice to keep the security deposit in a separate, specific account even if you are not legally obliged to do so under state law.

Additionally, in some states you are required to place the deposit into an interest bearing account and return the deposit alongside the interest that has accrued over the tenancy period when returning the deposit.

Common issues of commingling funds:

  1. Harder to Track. If you comingle your deposits with your everyday or business accounts it could be impossible to track the deposits whereabouts and in many states doing so could be detrimental to your ability to claim part of the deposit for property damages.
  2. Personal Spending. You may end up spending the deposit by accident which would make it hard for you to return it.
  3. Tracking Interest Accrual. Many states demand that the landlord amass interest on the tenant’s behalf and pass it onto them when they return the deposit. Having the deposit mixed in with other funds makes it nigh impossible to determine the correct amount of interest to return to the tenant.

It’s important, from a business standpoint, to keep your tenants’ deposits separate from your personal funds. When a tenant hands you their security deposit, it’s your responsibility as their landlord to keep it safe. Once you have inspected their apartment prior to moving out, only then can you determine if you’ll return it in full or keep a portion of it due to damages.

Setting your 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 again when setting your deposit amount be sure to first research what this limit is dependent on 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 site it so low that it won’t cover any damages that may occur to the property.

On average, the security deposit is equal to 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.

tenant screening

When can you Keep the Tenant’s Security Deposit?

This again can vary state by state. In general, however, the security deposit can be used to clever costs of damages to the property or unpaid rent. These damages, for example, could include stains in the carpet which need to be professionally removed, broken appliances, or holes in the wall.

A security deposit is NOT to be used to pay for normal wear and tear on the property.

When determining how much to deduct from the deposit, if you choose to do so you must keep exact records of the work completed.

The landlord or property manager must return then return the deposit or give the tenants written notice of claimed damages within the time allowed by each state.

Security Deposit Accounting with Landlord Studio

The security deposit at no time does the security deposit belong to the landlord. You are able to take deductions from the security deposit should tenants damage the property. However, to do this legally in most states requires an itemized bill of repairs and deductions. Which means as a landlord the way in which you do your accounting for security deposits is vital.

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.

Tracking and accounting your tenant’s security deposits can easily be done in the Landlord Studio software.

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How to Account for Security Deposits in Landlord Studio: A Step by Step Guide

Logging the Deposit in the System

This works for both our desktop software and our apps.

Step 1. Navigate to the relevant property via the left-hand menu bar. You can open this on the app by tapping on the hamburger menu on the top left of the screen.

Step 2. Tap on the ‘Log Payment’ button. This will allow you to record an income amount.

Step 3. Enter the deposit amount, and set the payment category as “deposit”.

You can make additional notes here as well. For example, noting the security trust you have placed the deposit with.

Step 4. Hit Save.

Returning a Deposit

Step 1. Work out the amount that needs to be returned. (Deposit amount minus costs of damages deducted from deposit).

Step 2. Hit the “Log Payment” button on the property dashboard and enter a negative amount for the amount of deposit being returned.

For Example:

If the deposit was $1000 you would log a payment of $1000 with a payment type of deposit.

When returning it you would log a payment of -$1000 in the same place.

However, if the tenant was responsible for damage to the property above and beyond normal wear and tear you can subtract the expense for those damages from the deposit. For example, if there was $250 worth of damage you would log -$750 in the system.

It is worth making a note here for the reference to the itemized damages deducted for this expense. You would additionally want to log the expenses that have been deducted from the deposit under the expense section on the property to balance the books.

Alternative Methods

Our software is pretty adaptable so there are alternative methods that some of our users use to get the same effect. The key thing to remember is that you need your expenses for damages to reflect the “income” collected from the deposit.

For the most common alternative method, you need to return the full deposit by logging a negative income in the software. Then under expenses for that property add in each expense marking them as payable by tenant. This allows you to add notes to individual expenses detailing and itemizing the damages.

Final Notes on Security Deposit Accounting with Landlord Studio

After you log the deposit in the system as a payment you will want to change the filters on your dashboard and reports so that they don’t show the deposit as income.

You can make a note of the deposit scheme reference in your lease details by either editing the current lease or when you create your lease details.

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Ben Luxon

"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. His love of travelling has taken him to over 10 countries in the last year, where he has sampled the craft beer of them all."

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