How to Manage Security Deposits
As a landlord, managing security deposits can be a tricky and often confusing part of the rental process.
Whether you are a seasoned pro or just starting out, it's important to have a solid understanding of what security deposits are, how to handle them, and the legal guidelines that come with them.
So, in this blog post, we will be going over every aspect of managing security deposits to make sure that you have no issues with your tenants.
To begin, let’s discuss some of the security deposit laws that you, as a landlord, should know about.
Part I: Security Deposit Laws
When it comes to security deposits, there are both state and federal laws that landlords should be aware of.
Let's talk about both now:
Federal Laws
These include:
The Truth in Lending Act (TILA)
This law requires landlords to disclose certain information to tenants about the security deposit, including the amount of the deposit, where it will be held, and the conditions under which it will be returned.
The Fair Credit Reporting Act (FCRA)
This law applies to security deposits that are held by credit reporting agencies. It requires landlords to provide tenants with certain disclosures, including a notice of their rights under the FCRA.
The Fair Housing Act (FHA)
This law prohibits discrimination in housing based on certain protected classes, including race, color, national origin, religion, sex, familial status, and disability. Landlords cannot charge different security deposit amounts or have different policies for tenants based on their protected class.
Apart from federal laws, there are also some common state laws that property managers must have in mind before setting their security deposit amount, which we will discuss below.
State Laws
In addition to federal laws, landlords should also be aware of the specific laws and regulations that apply to security deposits in their state.
These can include:
- Maximum amount: Many states have laws that limit the amount of the security deposit that landlords can charge.
- Interest: Some states require landlords to pay interest on security deposits held for a certain period of time.
- Return of deposit: Some states have specific laws and regulations regarding the return of the security deposit, including how long landlords have to return the deposit after the tenant moves out and what deductions can be made from the deposit.
- Record keeping: Some states require landlords to keep certain records related to security deposits, such as receipts for repairs made with deposit money.
However, keep in mind that, unlike federal laws, every state has slightly different laws regarding security deposits.
It's extremely important for any landlord or property manager to follow these laws closely.
If not, they can face some pretty severe consequences, which we will discuss below.
Penalties for Non-Compliance
It's important to keep in mind if you fail to comply with federal and state laws related to security deposits, as a landlord you can face penalties.
These can include:
- Fines: Landlords may be subject to fines for failing to comply with federal or state laws.
- Return of deposit: Landlords may be required to return the security deposit to the tenant, even if there is damage to the property.
- Civil lawsuits: Tenants may be able to file a civil lawsuit against the landlord for failing to comply with security deposit laws.
The best way to ensure you're following your state's unique laws is to find out your unique security deposit laws.
For that, you can check out our landlord-tenant laws resource page with security deposit laws for every state:
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With that said, now that we know everything about the laws regarding tenant security deposits, let's discuss the best practices for collecting and holding these security deposits.
Part II: Collecting & Holding Security Deposits
It is crucial for landlords in this stage to be very cautious and make sure that they are doing everything how it should be done.
Below, we have outlined all of the necessary steps when collecting and holding security deposits from tenants.
Collecting Security Deposits from Tenants
When collecting security deposits from tenants, landlords should follow these steps:
- Clearly state the amount of the security deposit in the lease agreement
- Collect the security deposit before the tenant moves in
- Accept payment in the form of cash, check, or money order
- Provide a security deposit receipt for the security deposit
Landlords should also collect the security deposit before the tenant moves in, and make sure to provide a receipt for the deposit.
How Much Can You Charge for a Security Deposit
The amount that landlords can charge for a security deposit can vary depending on state and local laws.
Some states have laws that limit the amount of the security deposit that landlords can charge. In other states, landlords can charge up to a certain percentage of the rent.
It's important for landlords to check their state's laws to understand the maximum amount they can charge for a security deposit.
If you're using a property management company, you will most likely not have to worry about this as they have more experience and will likely do everything correctly.
Holding Security Deposits
Once the security deposit has been collected, landlords have to decide how to hold the deposit. The options include:
- Holding the deposit in a separate, interest-bearing account
- Holding the deposit in a separate bank account without interest
- Posting a bond with the state
It's important for landlords to check their state's laws to understand the specific options available to them.
The Importance of Providing a Receipt
When collecting a security deposit, landlords should provide tenants with a receipt that includes the following information:
- The amount of the deposit
- The date the deposit was received
- The name of the person who received the deposit
- The purpose of the deposit
Providing tenants with a receipt for the security deposit can help to protect landlords in case of any disputes.
Handling Multiple Security Deposits from Co-tenants
When there are multiple tenants that pay rent on a lease, landlords may collect a security deposit from each tenant.
It's important for landlords to keep track of the deposit from each tenant and to make sure that the deposit is returned to the correct tenant when the lease is over.
Landlords should also make sure that each tenant is aware of their responsibilities regarding the security deposit and that each tenant is provided with a receipt for their deposit.
After collecting and holding the security deposit, the only thing left to do is return the security deposit, which we will discuss in the next section.
Part III: Returning Security Deposits
Returning the security deposit is almost as important and delicate of a practice as collecting it.
One of the most important things to do at this stage is to determine the security deposit deductions, which we will explain just below.
How to Determine Deductions from the Security Deposit
When a tenant moves out of a rental property, the landlord is responsible for determining any deductions that should be made from the security deposit.
This process should be done in a timely manner, typically within 14 to 30 days after the tenant moves out.
The landlord should conduct a move-out inspection on the property and make a list of any damages or cleaning that needs to be done.
The cost of these repairs or cleaning should then be subtracted from the security deposit. The landlord can also deduct unpaid rent payments from the security deposit.
If the property does not have any damage and there is no missed rent, then the landlord should return the full security deposit.
What Damages are Allowed to Be Deducted from the Security Deposit?
It is important to note that not all damages or cleaning costs can be deducted from the security deposit.
Landlords are only allowed to deduct damages that were caused by the tenant, and that were not present at the beginning of the tenancy.
Common damages that are allowed to be deducted include:
- Damage to walls, floors, or ceilings
- Stained or torn carpets
- Broken or missing light fixtures
- Damage to appliances or fixtures
- Excessive cleaning costs
It is also important to note that normal wear and tear, such as faded paint or worn carpet, cannot be deducted from the security deposit.
How to Document Damages
In order to make deductions from the security deposit, it is essential to document the damages.
This can be done by taking photographs or videos of the damages and making notes about the condition of the property at the time of the tenant's move-out.
It's also a good idea to have the tenant walk through the property with you before they move out so that they can see any damages and agree to the deductions.
How to Return the Security Deposit
Once the deductions have been determined, the landlord is responsible for returning the remaining portion of the security deposit to the tenant.
This should be done in a timely manner, typically within 14 to 30 days after the tenant moves out.
The landlord should also provide the tenant with an itemized list of deductions, along with any supporting documentation such as photographs or receipts.
How to Handle Disputes over Deductions
In some cases, a tenant may dispute the deductions that have been made from their security deposit.
If this happens, the landlord should be prepared to provide evidence of the damages, such as photographs or receipts.
If the dispute cannot be resolved between the landlord and tenant, the matter may need to be taken to small claims court.
Manage Security Deposits Properly
Collecting, holding, and returning security deposits can be tricky and it's vital that landlords know all the ins and outs.
As soon as you collect the security deposit, however, you have to know exactly how to manage it, as well as manage the upcoming rent payments.
For that, read on to learn about property management accounting in our next guide.
