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.
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.
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:
|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.
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.
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:
- 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;
- Obtain repair quotes from trusted handymen or contractors or use a cost of repairs list provided by the property management company;
- 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.
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.
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.