The Landlord’s 2021 Guide to Rental Security Deposits

Although landlords are not required by law to collect a rental security deposit, owners who don’t may open themselves up to potential risk if a tenant disappears in the middle of the night or trashes the property

When a landlord does charge a security deposit, local and state laws often dictate how large a rental security deposit can be, how it must be handled, and when the deposit must be returned to the tenant. 

In this article we’ll cover everything a landlord should know about a rental security deposit, including when a landlord may be able to use a security deposit to pay for damages caused by the tenant. As always, you should consult your own legal advisor to confirm the applicable laws in your jurisdiction.

What is a Rental Security Deposit?

A rental security deposit is money paid by the tenant to the landlord as a guarantee that the tenant will abide by the terms and conditions of the lease. The security deposit provides the landlord with assurance that the tenant will pay the rent in full and on time, take good care of the property, and not cause damage beyond normal wear and tear. 

As long as the tenant doesn’t violate any part of the lease, a rental security deposit is refundable when the tenant moves out.

 

exchanging money with wood house

When to Collect a Security Deposit

A rental security deposit is normally collected when the tenant signs the lease, prior to the tenant moving into the property. 

Many landlords prefer that payment of a security deposit be made by guaranteed funds, such as cash, a money order, or an electronic funds transfer. Landlords can also set up a free account with online rent payment websites such as RentTrack or Cozy to collect the security deposit and monthly rent payments.

 

Rental Security Deposit vs. Last Month of Rent

Some landlords agree to let the tenant use the rental security deposit to pay for the last month of rent, but there’s a danger in doing this. 

If the security deposit is treated as the final rent payment, a landlord will not have access to the rental security deposit to pay for damages caused by the tenant. For that reason, landlords often ensure that the rental agreement specifically states that the rental security deposit can not be applied to the last month of rent. 

 

woman using calculator

How to Calculate a Rental Security Deposit

There are several things to consider when calculating the amount of the security deposit to collect from a tenant, including:

  • The monthly rent amount, with the rental security deposit often equal to one or two times the monthly rent;
  • Type of property, such as a large single-family home vs. a multifamily property with several smaller units;
  • Rental security deposits charged by similar competitive properties, to avoid attracting unqualified renters by collecting a deposit that is lower than the competition; and
  • Rental history and credit score of the applicant, especially with tenants renting for the first time with no history or references on which to judge potential risk.

 

Limits to a Tenant Rental Security Deposit

Some state landlord-tenant laws (and even city or municipal rent control regulations) may place a limit on how large of a tenant rental security deposit a landlord can collect. 

Here’s a state-by-state list of rental security deposit limits as compiled by the legal resource website Nolo.com:

State Limit
Alabama 1 month of rent
Alaska 2 months of rent
Arizona 1 1/2 months of rent
Arkansas 2 months of rent
California 2 months of rent
Colorado No statutory limit
Connecticut 2 months of rent
Delaware 1 month of rent
District of Columbia 1 month of rent
Florida No statutory limit
Georgia No statutory limit
Hawaii 1 month of rent
Idaho No statutory limit
Illinois No statutory limit
Indiana No statutory limit
Iowa 2 months of rent
Kansas 1 mont of rent
Kentucky No statutory limit
Louisiana No statutory limit
Maine 2 months of rent
Maryland 2 months of rent
Massachusetts 1 month of rent
Michigan 1 1/2 months of rent
Minnesota No statutory limit
Mississippi No statutory limit
Missouri 2 months of rent
Montana No statutory limit
Nebraska 1 month of rent
Nevada 3 months of rent
New Hampshire 1 month of rent
New Jersey 1 1/2 months of rent
New Mexico 1 month of rent
New York 1 month of rent
North Carolina 1 1/2 months of rent
North Dakota 1 month of rent
Ohio No statutory limit
Oklahoma No statutory limit
Oregon No statutory limit
Pennsylvania 2 months of rent
Rhode Island 1 month of rent
South Carolina No statutory limit
South Dakota 1 month of rent
Tennessee No statutory limit
Texas No statutory limit
Utah No statutory limit
Vermont No statutory limit
Virginia 2 months of rent
Washington No statutory limit
West Virginia No statutory limit
Wisconsin No statutory limit
Wyoming No statutory limit

 

It’s worth remembering that, while some states place no statutory limit to the amount of a security deposit a landlord can charge, cities and municipalities within the state may place a cap on the rental security deposit amount. In addition, in most cases, the limit to the security deposit does not include pet deposits. 

 

house with money on scale

How to Account for a Rental Security Deposit

It’s important for rental properties owners to keep accurate records, including accounting for a rental security deposit. 

When a tenant security deposit is refundable, it is treated as a liability on the property balance sheet, because the deposit is intended to be returned to the tenant. On the other hand, if a landlord agrees to use the security deposit for the last month’s rent, the IRS considers the deposit to be rental income paid in advance.

Maintaining good accounting records can be complicated, even for investors with one rental property. That’s why many landlords and property managers use Stessa to keep an accurate accounting of the security deposit and rent received. 

After signing up for a free account on Stessa, simply enter the property address, securely connect the bank accounts associated with the property, and begin automatically tracking income and expenses.

 

Where to Deposit a Rental Security Deposit

Each state has different rules on where to deposit a rental security deposit. Some states require the landlord to maintain an interest-bearing account with any accumulated interest paid to the tenant. 

While other states have less rigid rules, landlords are prohibited from commingling the rental security deposit with other owner funds or using it for purposes other than what the security deposit was intended for. 

For example, if the security deposit is $1,000 and the owner needs extra cash to pay for a large repair bill, the owner is not allowed to “borrow” from the $1,000 deposit and pay it back at a later date. 

That’s why many landlords and property managers maintain a separate account for security deposits, to avoid accidentally commingling money.

 

keys with money

Can a Landlord Holdback a Tenant Security Deposit?

There may be situations when a landlord can keep all or part of the tenant security deposit, depending on state landlord-tenant laws, including:

  • For unpaid rent or to pay late fees, eviction, and collection costs;
  • To cover unpaid bills that are the responsibility of the tenant, such as utilities; 
  • If the tenant violates a term or condition of the lease like leaving before the end of the lease;
  • Cleaning costs, if the tenant leaves the home excessively filthy with accumulated trash or debris;
  • Damage to the property beyond normal wear and tear, such as oil stains on the carpet or shattered windows.

There are three steps a landlord should follow when calculating whether and how much of the rental security deposit to hold back from the tenant:

  1. Review the move-in and move-out checklists to compare the before and after condition of the property to distinguish between normal wear and tear and unusual damage caused by the tenant;
  2. Obtain repair quotes from trusted handymen or contractors or use a cost of repairs list provided by the property management company;
  3. Promptly remit the remaining security deposit to the tenant along with an itemized list of repairs and how much of the security deposit was used to pay for damages caused by the tenant.

 

When to Return a Rental Security Deposit

State landlord-tenant laws also dictate when the rental security deposit must be returned to the tenant. 

In some states, the return of the security deposit must take place within 14 days after the lease ends, while other states give a landlord between 30 – 60 days before the rental security deposit must be returned. 

Many states allow the tenant to sue the landlord for damages if the security deposit is not returned within the statutory time limits or wrongfully used to pay for repairs that are normal wear and tear, so it’s important to know the legal requirements of your jurisdiction.

 

wood house with loose coins

Common Landlord Security Deposit Mistakes

A security deposit can help to protect a landlord, but only up to a certain point. Here are some common mistakes and misconceptions that many landlords have about rental security deposits:

  • Skipping tenant screening because a security deposit is collected;
  • Not completing a move-in and move-out checklist when the lease begins and ends;
  • Commingling and the rental security deposit with owner operating funds;
  • Illegally using the security deposit to pay for normal property operating expenses;
  • Not itemizing labor and material costs when using the rental security deposit to pay for damages caused by the tenant; and
  • Missing the statutory deadline to refund the security deposit to the tenant.

 

Final Thoughts

Collecting the monthly rent is easy, but knowing how a rental security deposit works can be much more complicated. A security deposit is money paid by the tenant to the landlord as a guarantee that the terms and conditions of the lease will be abided by. 

Throughout the term of the lease, the rental security deposit must be held by the landlord and promptly returned to the tenant when the lease comes to an end. 

In some instances, interest earned on the security deposit must be paid to the tenant, and the landlord may be able to withhold all or part of the tenant deposit to pay for damages beyond normal wear and tear.

 

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This article, and the Roofstock Blog in general, is intended for informational and educational purposes only, and is not investment, tax, financial planning, legal, or real estate advice. Roofstock is not your advisor or agent. Please consult your own experts for advice in these areas. Although Roofstock provides information it believes to be accurate, Roofstock makes no representations or warranties about the accuracy or completeness of the information contained on this blog.
Jeff Rohde

Author

Jeff Rohde

Jeff has over 25 years of experience in all segments of the real estate industry including investing, brokerage, residential, commercial, and property management. While his real estate business runs on autopilot, he writes articles to help other investors grow and manage their real estate portfolios.

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