How to hold and use a security deposit

The purpose of a security deposit is to provide protection to the landlord against any potential damages or unpaid rent caused by the tenant during their occupancy of a rental property. It serves as a form of financial security for the landlord and is typically collected before the tenant moves into the property.

Why hold a deposit?

Here are a few key uses of a security deposit.

Covering damages

The security deposit can be used to cover any damages beyond normal wear and tear that the tenant may cause to the property or its contents during the lease term. This can include repairs to walls, floors, appliances, or any other part of the property that is damaged or deteriorated by the tenant.

Covering unpaid rent

In many states, the security deposit can also be used to cover any unpaid rent or other expenses specified in the lease agreement, such as late fees or utility bills, if the tenant fails to fulfill their financial obligations.

When this is possible, the security deposit provides you with a financial safety net in case the tenant abruptly terminates the tenancy without fulfilling their obligations.

States where it's legal to use security deposits for unpaid rent:

• California: Landlords can use the security deposit to cover unpaid rent, cleaning, and damages beyond normal wear and tear.
• New York: Landlords can apply the security deposit toward unpaid rent, repairs, and cleaning.
• Texas: Landlords may deduct unpaid rent from the security deposit.
• Florida: Security deposits can be used to cover unpaid rent and costs related to repairing damage caused by the tenant.
• Illinois: Landlords can apply the security deposit to unpaid rent and damages, but specific regulations may vary by municipality.
• Ohio: The security deposit can be used for unpaid rent, damage beyond normal wear and tear, and cleaning costs.
• Washington: Landlords can use the security deposit to cover unpaid rent and the cost of repairing damage.
• Georgia: Security deposits can be used for unpaid rent, cleaning, and damages.
• Pennsylvania: Landlords may apply the security deposit to unpaid rent, damage repair, and cleaning.
• North Carolina: Security deposits can be used to cover unpaid rent, damages, and other expenses specified in the lease agreement.

Deterring bad behavior

The security deposit can incentivize the tenant to vacate the rental property in good condition and within the agreed-upon time frame, as they would want to ensure the return of their deposit in full.

Best practices for managing deposits

Transparency

In many states, landlords are required to provide an itemized statement detailing how the security deposit was used, particularly if any deductions are made, as well as the location of the funds and whether or not it is earning interest.

Do not commingle funds

Deposits should always be kept in a separate bank account from the general accounts used to fund rental operations.

Build a clear, defined process

It's important to have a clear system in place for returning some or all of a security deposit once the lease has ended and the tenant has moved out. Follow these steps:

1. Hold yourself to a deadline. Your lease agreement should include the timeframe within which you promise to return the security deposit. States often have specific time limits within which landlords must return the remaining security deposit. This period usually ranges from 14 to 60 days.
2. Inspect the property. Schedule a thorough inspection of the rental unit after the tenant moves out. Document the condition of the property and any damages or necessary repairs.
3. Assess the damages and subtract the cost of necessary repairs or cleaning from the security deposit. Make sure to itemize all deductions and keep receipts or invoices as evidence.
4. Provide the tenant with an itemized list of deductions along with the remaining balance of the security deposit. This list should detail each deduction, the cost involved, and any supporting documentation.
5. Within the timeframe specified by your local laws, return the remaining balance of the security deposit to the tenant. This can usually be done by mail or electronic transfer
6. Communicate any disputes: If the tenant disputes any deductions or the withholding of the security deposit, engage in a dialogue to try and resolve the issue. If a compromise cannot be reached, follow the necessary legal procedures for dispute resolution in your jurisdiction.

Your local laws

It's important to note that the specific laws and regulations governing security deposits can vary by jurisdiction. Landlords must adhere to these laws and follow the required procedures for collecting, holding, and returning security deposits to tenants. Before moving forward, read up on the laws about security deposits in your state.