Security deposits are paid before the tenant moves in, typically when they sign the lease. They protect landlords against non-payment of rent and utility bills or from property damage. They also motivate tenants to adhere to rental agreement terms so they stand a better chance of recovering the entire amount.
While security deposits aren’t meant to serve as last month’s rent, the amount your tenant pays each month is sometimes used to determine how much of a deposit you can request. Maximums vary by state. For example, in Arizona, a security deposit can’t exceed more than one and a half month’s rent. In Iowa, the limit is two months’ rent.
A landlord can deduct for needed repairs above and beyond normal wear and tear that was caused by the tenant or people the tenant can be held accountable for. Reasonable damage is subjective and depends upon factors such as the age of the property, renovation work done, and duration of tenancy. Regular wear during occupancy includes furniture marks, faded curtains, wearing off of carpets and rugs from normal use, and faded or chipped paint. Wear severe enough to be considered damage includes doors coming loose off the hinges, excessively dirty blinds, curtains, bathtubs, and walls, chipped bathroom tiles, and broken appliances.
As a rule, security deposits are refundable if the tenant has fulfilled the terms and conditions of the rental agreement. However, eleven states allow landlords to charge non-refundable deposits. These states include Georgia, Florida, Arizona, Nevada, New Jersey, North Carolina, Oregon, Utah, Washington, Wisconsin, and Wyoming. The non-refundable deposit may be used by landlords to clean and repair the property to get it ready for future tenancy. If non-refundable deposits are charged, then both the landlord and tenant must be clear about how the money will be used.
Before a tenant moves in, a thorough inspection of the premises is recommended. The findings of the inspection should be recorded in writing, though a video of the moving-in inspection will make comparison easier when it’s time to conduct a moving-out walk-through. It helps avoid disputes over reimbursement, especially if funds are taken out of the deposit to make repairs.
In states where deposits are refundable, a landlord is duty-bound to return the security deposit once the tenant vacates the property. You are also required by state laws to provide the tenant with a rough accounting of the security deposit before you can use the money for repairs, and this must be done in a timely fashion. A final statement, with the deductions properly listed, should be handed over later. Unfortunately, the laws in each state differ somewhat. For example, in New Jersey, you repay the deposit amount with interest. You may also be required to maintain a separate bank account for only deposit money to ensure it doesn’t commingle with other funds.
A landlord’s failure to abide by the rules and time limits established by the state can result in legal trouble. Tenants can sue and are often given leeway to collect more than they’re owed if they’re put through the trouble of going to court, so it’s important to do things by the book.
Depending upon your state of residency, if you sell property you are currently renting, you may be required to transfer the deposit to the new owner along with the interests accrued. The new owner is obligated to notify the tenant in writing about the change in ownership of property and the status of their deposit. In most places, you also have the option of returning the security deposit to the tenant instead of passing it on to the new landlord.
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