How to Avoid 4 Common Landlord Security Deposit Mistakes

Updated July 2021

Collecting security deposits from tenants is an essential part of being a landlord. However, handling security deposits is one of the most rule-specific responsibilities of a landlord’s financial world. If you make one of many potential security deposit mistakes, you could be on the hook for big fines or penalties.

Every state has particular rules governing everything from the allowed amount to charge as a security deposit, to how the funds must be held, to when and under what circumstances all or part of it should be returned to the tenant. Landlords must be familiar with the rules that determine how they should be handling security deposits.

Today, learn about the proper collection of security deposits and the most common security deposit mistakes made by landlords like you. With the right information, you can avoid many risky maneuvers.

A Table Of Contents For Landlord Security Deposit Rules

What can the landlord use the security deposit for, and how should the security deposit be handled while a tenant is renting? These are just a few of the many important questions that landlords should be able to answer. Let’s get started.

What Is A Security Deposit?

What Is A Security Deposit?

To get the most comprehensive information about security deposits, it’s important to start with the very basics.

What is a security deposit?

A security deposit is a set sum that a landlord collects to ensure the tenant will move into the property and treat it properly during their tenancy. The primary purpose of using a security deposit is to help ensure the condition of the property. The money can be used by the landlord to make future repairs should there be any damages during the tenancy.

It is considered a best practice by both new and experienced landlords to use a security deposit as a way to protect their property from unpredictable actions by tenants. Tenants who leave the apartment in good condition can receive the deposit back in full, so this type of negotiation is usually considered reasonable for both parties.

What Can A Security Deposit Be Used For?

Many new landlords and first-time renters have a similar question: What can the landlord use the security deposit for?

Security deposits are typically able to be used to repair all damages that go above and beyond the scope of normal wear and tear.

Normal wear and tear is considered to be anything that happens during a tenancy that isn’t caused by accident, negligence, misuse, or abuse of the property. Examples of normal wear-and-tear are:

  • Faded paint
  • Light wear of carpets
  • Fixtures that get old or break from age

However, any damages that go beyond the scope of these normal occurrences due to aging and use may allow for landlords to hold onto some or all of the security deposit. Such damages could include:

  • Stolen appliances
  • Structural damage to the property
  • Walls painted without permission
  • Unpaid rent

The exact rules about what a security deposit can be used to pay for depend on state and local laws. However, most of these laws hold a similar scope of what can be withheld from a security deposit in terms of damages.

How Long Does A Landlord Have To Return A Deposit?

Another critical aspect of the landlord security deposit is how long you can hold onto the funds at the end of the tenancy period. After the tenant moves out, you have a specific number of days to look over the property, get quotes on repairs, and let the tenant know what will be withheld from the deposit. Then, you must return any remaining money within a set amount of time.

And how much time do you have to return the deposit?

Well, that depends.

As with many aspects of landlord–tenant law, the specific number of days you have to complete the security deposit return depends on your state and local requirements. This means that while one state might give you a full month to make this return, other states may only allow you two weeks to loop the tenant in on the status of their deposit.

Generally speaking, most states’ laws about security deposits will include specific dates for each of the following steps if applicable:

  • Send tenants an itemized list of what will be withheld
  • Let tenants know how much of their deposit, if any, they will receive back
  • Return the remainder of the security deposit
  • Return any interest accrued on the security deposit

The time allowed for each of these steps can range from as little as 10 days to as many as 60 days depending on where your property is located.

To know exactly what you are responsible for when handling security deposits as a landlord in your state, make sure that you review your local laws.

Get To Know Additional Important Security Deposit Rules

As you can see, the exact rules about security deposits vary from state to state and even between cities within the same state. This means that you will have to do some additional legwork to learn exactly what guidelines to follow.

Check the rules in your state and locality for your final guide to how to handle tenant security deposits.

4 Common Landlord Security Deposit Mistakes

Although landlord security deposit collection and return rules vary from state to state, there are still many commonalities among how things go wrong for landlords. To reduce your liability regarding security deposits, start by avoiding these common mistakes.

1. Not Documenting Deposits

4 Common Landlord Security Deposit Mistakes

Every time money passes between you and a tenant or money passes from you to a third party on behalf of a tenant or rental property (such as when paying for repairs), make sure it is properly recorded.

When collecting a security deposit, specify that the funds are intended as a deposit, note the date and amount, and indicate where the security deposit will be held.

Many states require security deposits to be kept in special bank accounts and that the tenant be informed where the account is held. In most cases, landlords are not supposed to access these funds in any way until the tenancy period is complete.

The more regularly and clearly you document financial transactions, the better protected you will be if a dispute arises down the road, or if you face a tax audit. In either of these situations, not having the right documentation on hand about the security deposit could get you into both legal and financial trouble.

2. Spending The Security Deposit

In most places, the security deposit belongs to the tenant even while the landlord is holding it.

The landlord may spend it only on certain specific items, like damage beyond ordinary wear and tear or for unpaid rent in applicable states.

Trying to keep part or all of the security deposit to cover new appliances, cleaning, or anything else the security deposit does not cover may expose a landlord to liability. Make sure you know what you can and cannot take out of the security deposit, and stick to it.

A landlord cannot spend a security deposit without proper documentation and cause.

3. Keeping Deposit When Tenants Break Lease

It’s a common mistake made by inexperienced landlords: a tenant leaves early, and the landlord simply keeps the security deposit. In this situation, landlords falsely believe they are entitled to it in light of the tenant’s bad behavior and due to the expense of unexpectedly having to find a new tenant.

In fact, in most cases the landlord is responsible for returning the security deposit in the same manner they would have if the tenant had left at the end of the lease.

To collect money to cover the costs of the broken lease or unpaid rent owed to the landlord, the landlord must file the appropriate civil case and win a judgment.

4. Failing To Follow Return Rules

If you don’t know how long you have to return a security deposit after a tenancy period ends, you could be in hot water with your tenants and the law.

State-specific laws require that prompt notice, an itemized list of damages, and a waiting period for tenants to dispute any withheld portion of a security deposit must be used. The list of rules for when, where, how, and why a security deposit must be returned (or withheld) is long in any given state or city.

Failing to follow the rules, however, can easily expose a landlord to a potential lawsuit, with damages that may total several times the amount of the original security deposit in addition to legal fees and court costs.

It is in your best interest to find out more about security deposits and then make sure that your lease properly outlines these terms so you and your tenants are on the same page.

If you need help making sure that your lease and other documentation is up to par, check out RentPrep’s complete Landlord Starter Form Kit today.

To learn more about returning a security deposit, check out this video:

Security Deposits Explained: Common FAQs

Can a landlord spend your deposit?

Tenants who have not had their security deposits withheld might be shocked if it ever does happen to them. Can a landlord spend your security deposit without your permission?

Both tenants and landlords must be able to understand when a security deposit will be spent and for what. Yes, landlords can spend a tenant’s deposit according to the terms laid out in the rental agreement as long as they follow state and local laws.

This means that it is essential for landlords to explain in the rental agreement how and when a security deposit will be used. This ensures that both parties are on the same page, and unnecessary confusion will be avoided if some of the deposit is withheld.

Can a landlord deduct from the deposit for cleaning costs?

The rules on this subject may vary from state to state, but landlords can generally deduct funds from the security deposit to cover cleaning costs, but only in some cases.

For example, landlords are well within their rights to deduct cleaning costs necessary to return the rental unit to the state that it was in when the tenant moved in. This could mean getting the carpets shampooed as a deep clean if there is excessive dirt and grime. Additionally, this could include hiring a cleaning service for cleaning appliances or a kitchen that the tenant neglected.

However, landlords should not deduct basic cleaning costs from a security deposit unless this stipulation was clearly outlined as part of the rental agreement and is allowed in the applicable state.

Can a landlord deduct unpaid rent from the security deposit?

The short answer here is yes. As long as the rental agreement includes terms that specify this use for the security deposit, many city and state laws allow landlords to withhold any unpaid rent from the security deposit. This is why the security deposit is often equal in amount to one or two months of rent.

However, the security deposit cannot be used in place of the last month’s rent unless this is detailed in the lease agreement. In all other cases, the tenant’s last month’s rent must be paid separately, and then the landlord should return the security deposit less any amount to be withheld.

How long does a landlord have to return a deposit if evicted?

As with the normal circumstances of returning a security deposit, the amount of time that a landlord has to return the security deposit after eviction varies by location. The timeframe falls between 10 days and 60 days depending on city and state rules.

In the case of eviction, however, it is important to remember that the security deposit may not need to be returned in its entirety. Tenants who are behind on rent when they are evicted, for example, will likely not receive their entire security deposit back. The exact language used in the rental agreement about the security deposit will determine this aspect of the eviction.

Are security deposits taxable?

At the federal level, security deposits may or may not be taxable. Whether or not you will need to pay taxes on the deposit when it is received depends on how it will be handled down the line.

If you receive a security deposit and plan to return it in full, it is not taxable as it is not part of your income.

If you receive a security deposit and it will be applied to the last month’s rent, you must include this as part of your income as it is essentially advance rent. It should be handled in the same way that all other rental income is when doing your taxes.

If you keep the security deposit to cover damages caused by the tenant or to cover unpaid rent, then the amount withheld will need to be added to your rental income. The amount spent on repairing the damages can then be deducted as part of your business expenses.

What happens if damages exceed the collected security deposit?

If a tenant causes damages to a rental property that exceed their security deposit, landlords can collect extra funds from the tenant. However, it might be difficult unless you are very persistent.

First, make sure that your rental agreement includes the necessary terminology to explain what will happen if this situation occurs. Having this in the lease is a great security measure if you need to pursue a tenant for additional funding.

Next, go through the usual process of checking for damages, documenting all damages, and itemizing how much the repairs are going to cost. Send the itemized list to the tenant when you let them know that they will not be getting the security back, and include a bill that lets them know how much more they owe you.

If things are well-documented and this process was explained in the lease agreement, the tenant may simply pay off the bill to avoid any additional issues. If they do not agree to pay the bill, you will need to file a civil court case to collect the money you are owed.

Get Secure With Your Security Deposit Rules

As you’ve seen today, understanding the full extent of the rules and common security deposit mistakes made by landlords can be very beneficial. Avoiding liability and legal issues with security deposits is not too challenging if you know what is and is not allowed. With this information, you can make the right decisions.

A security deposit is meant to be a way for you to secure the future of your property. Don’t take this for granted and make mistakes that lead you to incur further costs and struggles. Instead, slow down and make sure you are fully informed about your local and state security deposit laws today!

Note: This article is not intended as legal advice and should not be taken as such. If you need help with a specific legal question, consult an attorney who is licensed to practice law in your area.