Landlord`s Guide

Every landlord knows what a security deposit is and how important it is to collect it from the tenants. But is it just that mere one-time amount you collect from tenants to protect your rental property or compel them to follow the lease? Is that all? Or, is there anything more to it other than just one-time money that you collect?  

Let me tell you, taking a security deposit is much more than that. Every state has specified certain rules around security deposits commonly termed as security deposit laws. And it is not that straight forward as you assume it to be.  Even to your surprise, if you don`t handle deposits carefully, your tenant can sue over the security deposit very easily. 

How Much Security Deposit a Landlord Can Charge?

There is no such uniformity or a plain white answer on how much security deposit for rental, a residential landlord can charge from their tenants. Each state has its own rules. And, even there are states where there is no such cap or restriction on how much deposit you can take from a tenant. 

In a nutshell, how much security deposit you can charge varies from 

• One Month of Rent (13 States of the U.S.) ^{Get the State Wise List}
• One and a Half Month of Rent (4 States of the U.S.)
• Two Months of Rent (8 States of the U.S.)
• Three Months of Rent (One State of the U.S.)
• Five Weeks of Rent (Mostly in the U.K if rent is less than 50,000 annually)
• Six Weeks of Rent (If Rent is more than 50,000 annually in the U.K.)

Additional Factors on How much deposit you can charge

• Whether you have a Furnished or an Unfurnished Unit? (Furnished Units usually have higher deposits)
• The Tenant`s Age (Lower deposit when tenant age is 62 years or older)
• Duration of the Lease (Month To Month Lease generally have no deposit limits for the first year)
• Whether the Tenant has a Pet (Higher Deposit in case of Pets)

The Case of Surety Bond

Security Deposit and a Surety Bond both provide a landlord the adequate protection in case the tenant fails to abide by the terms of the lease. But it works a little differently. And if you are thinking about how a surety bond is related to the security deposit limit, here is what you need to know. 

Surety Bond is a three-party agreement between you, your tenant, and the surety (guarantee) provider. The Bond guarantees that in case the tenant does not comply, violates the lease, or trashes your property on moving out; the bond issuer will pay for the damages of the total bond amount or even higher. However, this amount, the bond issuer will recover from the tenant only.  

The Surety Bond resembles a security deposit in a way that instead of the tenant paying you the deposit money, he signs a surety bond. Tenant pays a non-refundable bond fee of about 15%-20% of the deposit amount. So, if you accept a surety bond; the limit of how much deposit to take becomes null. Though it is not a compulsion for you to offer a surety bond instead of taking a full deposit

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How To Collect the Security Deposit?

The security deposit becomes due at the time the tenant signs the lease. So, to collect the deposit, the lease agreement must include a security deposit clause. The clause must clearly specify the following details

• The amount of security deposit that you intend to collect
• Where exactly will you be storing the deposit?
• Whether will you be paying interest on the deposit or not? 
• How can the tenant get the deposit back?
• In how many days will you return the deposit to the tenant after moving out.
• The List of applicable deductions

The Security Deposit Clause in the Lease 

• The Tenant on the expiry of the lease will hand over the peaceful possession of the property back to the landlord, subject to the inspection by the landlord. 
• The Tenant is required to supply the landlord with the forwarding address to refund the deposit. 
• If the tenant has complied with all the terms and conditions of the lease and returned the apartment in the same condition during the time of moving in but not limited to wear and tear, the landlord will return ‘X’ amount of security deposit plus interest of ‘Y’ amount within x days of moving out.   
• If there are any deductions and the deposit is not refunded in full, the landlord will provide an itemized list of deduction and will be citing the exact reasons for the deductions. And the remaining deposit will be refunded after making the allowed deductions.

Read: Must To Have Clauses In Your Lease

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How to Keep the Security Deposit?

Once you have collected the security deposit, it is important that you understand how to keep it properly. It’s a refundable deposit and should not be used before the expiry of the lease. You are required to keep the deposit in a separate checking account. Some states even may require you to keep the deposit in an escrow account.  

Not only you are required to keep the security deposit in a separate checking account or an escrow account. But you must also provide the details of the account where you have kept the deposit. For this, you can hand over a security deposit receipt to your tenant. 

“The Security Deposit of $_____________ is held in the separate bank account located at state of _______________________ and the city of ____________________.  The security deposit amount  has been deposited to the account no. __________________________ in the bank namely _____________________________ for the lease executed on  _____ day of ________ month in the year __________________. “

Should You Need To Pay Interest on the Security Deposit?

Not all states require that you pay interest on the deposit. But in some states, it requires that you pay interest on the deposit held in the account. If the tenant has lived at your property for six months or more, you need to credit the interest in their first month’s rent on the renewal of the lease. Or pay within 30 days of their move out along with the refundable deposit amount. 

The annual interest is 0.001% of the deposit amount with you. So if you are to pay interest, you must include the same in your security deposit receipt. 

“The Security Deposit is held in an interest-bearing account and the tenant is entitled to ____% interest annually or whatever be received from the bank where the deposit is held. “

Does Security Deposit Count as Rental Income?

The Security Deposit doesn’t count as a rental income unless you use the same in the part or full on the move out of the tenant for breaking the lease or to recover the damages. You might not need to count it as your income but you must report it. Unless you don’t use it or are still obligated to return it, it will not count as your income and is not taxable. 

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How to Return the Security Deposit? 

Once you receive the move-out notice from the tenant or when the tenant is no longer interested to renew the lease. You need to prepare to return the security deposit back to the tenant. And to return the deposit, you need to align a few ducks in the row, not literally though. 

The first thing you need to know here is the security deposit refund laws. Under these laws, there are certain guidelines for 

• The max time in which the security deposit has to be returned after the tenant`s move out
• If you have an intent to deduct a part or the full deposit. 
• When the Tenant makes a claim regarding the Deduction.  

How Much Maximum Time To Return Security Deposit?

Under the security deposit refund laws, you require to refund the deposit within 15 days to 30 days depending on your state after the tenant vacates your property. You should refund the deposit by a certified mail and send it to the forwarding address provided by the tenant. 

When you return the deposit, you must also include a security deposit return letter explaining how much amount you are returning and whether you have made any deductions. 

What If You Deducted from the Security Deposit?

If you deduct from the security deposit, you require to provide an itemized list of the deduction along with charges. Try to be as detailed as possible. Because an agitated tenant can sue you over a security deposit for making unnecessary deductions. 

“Dear Tenant _______________

You have placed a sum of $_______________ as a security deposit for your tenancy from ________________ to __________________ at the property of _________________ located at ____________________________________. 

Please note that you are charged for the violations of the lease for ______________________. According to the __________ state law, you are charged for these deductions.

List of Violations/ Damages

Violations :                                                                    Cost: 

a)

b)

c)

d)

e)

Should you have any further questions or any related concerns, please feel free to contact me at ___________________________”

Create Security Deposit Return Letter

Security Deposit Deduction List

You can deduct the monies for the violation of the lease, arrears, and the damages if any made to your rental unit beyond normal wear and tear. As per the laws that regulate the security deposits, a deduction can be done for  

• Violation of The Lease:

You can deduct from the tenant`s deposit if the tenant has incurred a lease violation. To deduct for the violation of the lease, your lease must have a clause stating what will be deducted for the case. 

Lease Clause
“If the lease has to be terminated early in case the tenant violates the terms and conditions of the lease. The tenant is still responsible to pay for the remainder of the lease. In such a case, the landlord will deduct the remaining amount from the deposit. And if the deposit amount is not sufficient, it is the tenant responsibility to pay the additionally required money owed to the landlord.”

• Arrears:

Having arrears is also a form of a lease violation. You can deduct a part or the complete security deposit of the tenant who is not able to fulfill the financial obligation of the agreement and has to vacate the premises. It can be a rent arrear or an unpaid utility. Deduct the amount from the deposit to cover the loss. 

Read: How to Recover Rent Arrears From the Tenant without needing him to leave?

• Damages to the Property:

Any damages beyond normal wear and tear are a direct violation of the lease. And in this case, you can deduct the cost of the repairs from the deposit. It is the responsibility of the tenant to keep the premises in a good condition without any damages except for normal wear and tear.   

What is not considered normal wear and tear?

• A large hole or small Multiple Holes in the wall 
• Stained Carpet
• Broken Tiles, Windows, Doors, Electrical Sockets or switches
• Water Damage to Hardwood floors

You can also charge your tenant for not cleaning up after moving out from the property and the cost of which can be deducted from the deposit. Not cleaning up can include not removing personal belongings, trash, and leftover food in the refrigerator. 

Read: What to do If the cost of repairs is beyond the Security Deposit?  

What If a Tenant has a Claim Regarding Any Deduction?

Disagreements are very common. And, disputes can arise regarding deduction with your tenant. When such disputes arise, a landlord has 45 days for the defense. Either you will file for your defense or the tenant will sue you regarding wrong deductions. 

In any case, you need to prepare yourself and gather as much proof as you can to defend your case. 

• The Copy of the Lease
• Evidence of Move in and Move Out Inspection. 
• Itemized Deduction List
• Receipts of the Repair Works Done
• Take the Damaged Item With You if possible (Like the Curtain, Carpet, etc.)