Chapter 4 Security Deposits

• Library: Every Landlord's Legal Guide (Nolo) (2020 Ed.)

CHAPTER 4 Security Deposits

Purpose and Use of Security Deposits

Dollar Limits on Deposits

How Much Deposit Should You Charge?

Last Month's Rent

Applying Last Month's Rent to Damage or Cleaning

How a Rent Increase Affects Last Month's Rent

How to Avoid Problems With Last Month's Rent

Interest and Accounts on Deposit

Separate Accounts

Interest

Nonrefundable Deposits and Fees

How to Increase Deposits

Handling Deposits When You Buy or Sell Rental Property

Most landlords quite sensibly ask for a security deposit before entrusting hundreds of thousands of dollars' worth of real estate to a tenant. But it's easy to get into legal trouble over deposits, because they are strictly regulated by state law, and sometimes also by city ordinance.

The law of most states dictates how large a deposit you can require, how you can use it, when you must return it, and more. Many states require you to put deposits in a separate account and pay interest on them. You cannot escape these requirements by putting different terms in a lease or rental agreement. This chapter explains how to set up a clear and fair system of setting, collecting, and holding deposits.

Our suggestions might exceed the minimum legal requirements for your property, but will ultimately work to your advantage, resulting in easier turnovers, better tenant relations, and fewer legal hassles.

RELATED TOPIC

Related topics covered in this book include:

• Charging prospective tenants credit check fees, finder's fees, or holding deposits: Chapter 1
• Writing clear lease and rental agreement provisions on security deposits: Chapter 2
• Highlighting security deposit rules and procedures in move-in and move-out letters to the tenant: Chapters 7 and 15
• Returning deposits and deducting for cleaning, damage, and unpaid rent; how to handle legal disputes involving deposits: Chapter 15
• State Security Deposit Rules: Appendix A.

Purpose and Use of Security Deposits

The general purpose of a security deposit is to provide funds for the landlord to use if the tenant fails to pay the rent, or leaves the property in a damaged condition. Rent you collect in advance for the first month is not part of the security deposit.

State laws typically control the amount you can charge and how and when you must return security deposits. When a tenant moves out, you will have a set amount of time (usually from 14 to 30 days, depending on the state) to either return the tenant's entire deposit or provide an itemized statement of deductions and refund any deposit balance.

Although state laws vary, you can generally withhold all or part of the deposit to pay for:

• unpaid rent
• repairing damage to the premises (except for "ordinary wear and tear") caused by the tenant, a family member, or a guest
• cleaning necessary to restore the rental unit to its level of cleanliness at the beginning of the tenancy (taking into consideration "ordinary wear and tear"), or
• restoring or replacing rental unit property taken or destroyed by the tenant.

States typically also allow you to use a deposit to cover the tenant's obligations under the lease or rental agreement, which might include payment of utility charges.

You don't necessarily need to wait until tenants move out to tap into their security deposits. You may, for example, use some of the security deposit during the tenancy if the tenant broke something and didn't fix it or pay for it. In this case, you should require the tenant to replenish the security deposit.

EXAMPLE: Millie pays her landlord Maury a $1,000 security deposit when she moves in. Six months later, Millie goes on vacation, leaving the water running. By the time Maury is notified, the overflow has damaged the paint on the ceiling below. Maury repaints the ceiling at a cost of $250, taking the money out of Millie's security deposit. Maury is entitled to ask Millie to replace that money, so that her deposit remains $1,000.

To protect yourself and avoid misunderstandings with tenants, make sure your lease...