California Security Deposit Laws for 2024 | Deductions, Returns, & Rights

CA Civ. Code §1950.5 regulates the collection and return of security deposits in California.

All property managers and landlords need to adhere to the rules and regulations established under California security deposit law in order to protect all relevant parties to a lease or rental agreement.

But, before we dive into what those are…

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Now, let’s dive in. 

Maximum Deposit

The maximum security deposit depends on the unit being leased. If you're leasing an unfurnished residential property, the maximum amount of the security deposit is equal to two month's rent.

However, for a furnished residential property, the maximum is the equivalent of three month's rent. The landlord may also add an additional half a month's rent if the lessee has a waterbed.

The cap is one month lower (one month's rent for unfurnished units and two months' rent for furnished units) if the tenant is an active service member. However, the lower restriction will not be applicable, even if the tenant is an active service member, in the following situations:

• The lease is shared, and there is at least one tenant on the lease who is not the service member's spouse, dependent, domestic partner, or parent.
• The lessee has a poor credit history or a history of damaging leased properties.

If any of the above mentioned points are applicable, the normal higher limits will be applicable.

What about pets? The landlord is permitted by California law to request an extra pet deposit. However, access to homes for people with disabilities who use service animals must be full and equal. Therefore, the landlord is not allowed to charge the tenant more for a service animal. The lessee is responsible for covering any costs incurred as a result of the service animal's damage to the rental unit.

Exceptions

In the following circumstances, California landlords may increase the security deposit specified in the rental agreement:

• If the period of the lease is six months or longer, the landlord may demand an advance payment of six months' rent or more.
• Aside from the cleaning and repair expenses billed to the prior tenant, the landlord may charge more for improvements to the rental unit that the lessee and the lessor have mutually agreed upon.

These exceptions only apply to rental agreements involving residential units. The limits will not apply to:

• Mobile Home Spaces - the limit is one month's rent.
• Leasing commercial property - there's no security deposit limit.

Allowable Deduction

Amounts that are deemed to be reasonably necessary for the following uses may be deducted by the property owner from the tenant's security deposit:

1. Cost of repair damages caused by the tenant.
2. Unpaid rent, including failure to give the landlord proper notice before  moving out.
3. Restoration costs specified in the lease agreement.
4. Cleaning costs when the lessee vacates the rental property.

The leasing agreement needs to mention these expenses. Even if a given expense fits one or more  of the aforementioned categories, the following conditions would prevent the landlord from deducting it:

1. Restoration costs or costs of repairs for normal wear and tear.
2. Cost of repairs for damages from the previous tenant. 
3. Even if it goes beyond what is "normal" for wear and tear, the cost of restoration or repairs for damage brought on the cumulative effects of wear and tear - for example, failure of an appliance due to deterioration over time and wax build-up on surfaces.

Wear and Tear

Damage

Under California law, damage is the term used to describe harm caused by a tenant's negligence or abuse during the tenancy. The leased property's value, functionality, or ability to perform normally is adversely affected by damage. Pet damage (such as torn carpets and stains), cracked tiles, holes in the wall, shattered windows, and missing fixtures are a few examples.

Normal Wear and Tear

Minor problems that naturally arise are referred to as normal wear and tear. Loose door handles, gently worn carpets, fading floor and wall paint, damaged bathroom fixtures, and mildew are a few examples of ordinary wear and tear.

Deposit Returns

After the renter vacates the rental unit in California, the landlord has 21 calendar days to refund the tenant's security deposit.

The landlord does not need to return the security deposit earlier than:

1. 60 calendar days before the expiration of the lease
2. In terms of leases without a set term, the final day to give notice to comply with the statutory minimum number of days' notice of termination.

If the landlord wants to terminate a lease without a fixed term, the refund must be made 60 days before the termination date if the tenancy lasted at least one year, or 30 days before the termination date if the agreement lasted for less than a year.

However, if the lessee is terminating a month-to-month lease, the tenant's security deposit needs to be refunded 30 days before termination. In terms of other leases without fixed terms, the amount can be refunded on terms agreed upon by the two parties; however, this cannot be more than 30 days, less than seven days, or before the termination date.

Security deposit disputes are quite common. Therefore, it is best to go to small claims court if there are any unresolved issues regarding unpaid rent or another subject matter.

The basis and cost of deductions must be disclosed to the tenant in a written notice or an itemized statement from the landlord. It is appropriate to hand deliver the notification or send it first-class mail with pre-paid postage. The landlord must send the written notice by first-class mail to the address of the vacated rental unit if the tenant failed to supply a forwarding address. The security deposit or the remaining balance can be paid by putting it in a bank account, or the landlord and tenant can send the itemized statement by email.

Copies of invoices for contracted services, as well as the receipts for items acquired, should be provided to tenants. The landlord may provide a fair estimate of the costs if the paperwork is not available within the allotted 21 days or the repairs are incomplete.

Within 14 days of the work being finished or receiving the necessary documentation, the landlord is required to give the lessee an itemized breakdown of the expenses.

However, the lessor will not need to give the tenant an itemized list if:

1. The deductions are less than $125
2. In writing, submitted along with the tenant's notice of termination, the tenant waived all claims arising under them.

Tax Filing

Tax consequences are dependent on whether or not the landlord keeps the security deposit.

Taxable Income

When California landlords receive security deposits, they are not immediately regarded as revenue. Security deposits should not be considered income, according to the IRS. They only turn into taxable income once the landlord is no longer required to return them. 

Reporting the Security Deposit as Income

Depending on what it is being used for or applied to, a security deposit may or may not need to be recorded as income. Here are three straightforward guidelines provided by the IRS:

1. The landlord shall only count the portion of the security deposit utilized as income when the security deposit is used to pay for expenses that are chargeable to it, and the landlord recognizes the cost of repairs as an expense. There is no need to report the portion of the deposit retained to cover these costs as revenue if the landlord doesn't routinely count them as expenses.
2. The money retained when a deposit is forfeited for violating the terms of the lease or used to cover unpaid rent must be reported as income in the year that the deposit was applied or lost.
3. The landlord should include the deposit as revenue when it is received if the parties have agreed to use all or a portion of it as the final month's rent.

Additional Rules

Interest Payments

Landlords are not required by California law to pay interest on security deposits. However, a few Californian cities require interest rate payments, such as Los Angeles, Berkeley, Capitola, Santa Cruz County, West Hollywood, and San Francisco.

Initial Inspection

Initial inspections help identify any damage in the property and provide the tenant the opportunity to repair it in order to prevent or reduce deductions from their security deposit. The landlord must provide the tenant notice that the unit must undergo an initial inspection within a reasonable amount of time but no earlier than two weeks after the lease expires.

The initial inspection may be skipped by the lessee. Furthermore, the landlord must give the tenant an itemized statement of the cleanings and repairs if the tenant chooses to conduct an initial inspection. Note that only cleanings and repairs over and above regular wear and tear may be covered by the landlord.

Alteration to Accommodate Tenants with Disabilities

A landlord is required to permit reasonable adaptations to the rental unit made by a tenant with a disability. The landlord may demand that the occupant sign a contract promising to return the rental unit's interior to its original state.

California law prohibits the landlord in this case from requesting an additional security deposit. To restore the rental property, the landlord and tenant may, nevertheless, agree that the tenant would deposit a "fair estimate" of the restoration costs into an escrow account as part of the lease agreement.

Non-refundable Security Deposits

Refunds of security deposits are always possible in California. A lease agreement may not state that security deposits are non-refundable, according to California law.

New Owner's Responsibility

If the landlord intends to sell or transfer ownership of the property during the lease term, the lessor may either:

1. Return the security deposit
2. Transfer the security deposit to the new owner

Before selling the property, the landlord must make the aforementioned decision and inform the purchaser. The following information must be included in a written notice that the landlord gives to the new owner before the sale:

1. An itemized statement of deductions made
2. The amount of the security deposit
3. Inform the lessee of the location of the security deposit

If these requirements are not met, the landlord and the prospective buyer will be held jointly and severally liable for paying the tenant's security deposit back.

The Bottom Line

The landlord-tenant laws include the security deposit. A landlord must be familiar with the security deposit laws if they want to maintain a positive relationship with their tenant. If you are struggling to resolve any disputes with your tenant and the rental agreement does not offer guidance, the matter can be handled in small claims court.