Everything You Need to Know About Security Deposits

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Security deposits are a common way to protect your rental business against the costs of incidentals and damages.

Collecting a security deposit from your tenants before move-in gives you access to funds you can use to make repairs, cover unpaid bills, and clean beyond the scope of reasonable wear and tear.

Security deposits are relatively unregulated at the federal level. However, state governments and localities enforce many regulations for security deposits, including how much you can charge, when you must return it by, and whether you pay interest on the amount.

Navigating security deposit procedures can be confusing if you don’t know which laws apply to you. It’s essential to research the laws in your state and county to fully understand how to charge a security deposit.

Below is an overview of security deposit regulations across the states.

Amount Limits

Twenty-seven states have laws limiting the amount landlords can charge for a security deposit. The rest have no statutory limits, but individual cities or localities within them may set security deposit maximums.

Most state governments cap security deposits at one to two months’ rent. However, the maximum amount can vary even within states, depending on a variety of factors: whether the unit is furnished or unfurnished, the length of the tenancy, pets present, or other special conditions.

While increases on account of pet ownership are sometimes permitted, it’s never legal to increase security deposits or charge additional fees for service animals. These animals and their owners are federally protected under the Americans with Disabilities Act (ADA).

In some states, security deposit limits change depending on the landlord’s monthly rent rate. For example, in Alaska, security deposits are capped at 2 months’ rent except if rent exceeds $2,000 per month.

Interest

Several states also require landlords to pay interest on security deposits. 

If you live in New York, Illinois, Ohio, Massachusetts, or North Dakota, you must keep security deposits in an interest-bearing bank account, usually at 5% interest. 

State laws dictate when interest should begin to accumulate, which can depend on the length of the tenancy or the number of units you operate. For instance, landlords in Ohio must begin applying interest when the tenancy exceeds six months. In New York and Illinois, security deposit interest applies when the landlord acquires more than 6 or 25 units, respectively.

Deposits Holdings

Sometimes, it’s not enough that you keep the tenant’s security deposit in an interest-bearing bank account. In some states, you must also disclose the bank where you’re keeping the deposit and report the interest rate directly to your tenants. 

For this reason, deposit holdings is often listed as a “required disclosure” which landlords must include in a lease or rental agreement. Before you collect a security deposit, find out whether you’re required to provide a receipt of the deposit or regularly report the interest accrued.

Returning Deposits 

All 50 states have laws specifying how much time landlords get to return deposits. This timeframe ranges from 14 to 60 days after the lease termination date. 

If you withhold all or part of the security deposit, you must notify your tenant what you’re keeping and why.

States that give landlords more time to return the deposit are considered more landlord-friendly because they allow more time to scrutinize the property for chargeable damages. While you typically can’t withhold funds for reasonable wear and tear on a unit, use the time allotted by your state to walk through the unit and identify damages beyond slow deterioration. 

Other Regulations

Besides the basic procedures for collecting, holding, and returning security deposits, many states delineate extra procedures for their handling. 

Here are some of the possible regulations:

  • Security deposit receipts before move-in (required in 11 states)
  • Itemized list of withholdings 
  • Restrictions on why and how much you can withhold
  • Time limit to deposit the payment (e.g., 30 days in Massachusetts)

Conclusion

The security deposit is a basic element of the leasing process familiar to most landlords. If you aren’t aware of the regulations in your state, be sure to do your research before collecting any deposits. By understanding exactly how to collect and enforce them, you can make security deposits a simple and helpful aspect of your rental leasing.

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