Definition and Rules of Security Deposits

State laws vary so be sure you know yours

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A security deposit is a sum, usually in the form of money, that a tenant agrees to pay to a landlord before taking possession of and moving into a rental unit. The amount is usually based on the monthly rent. Many landlords require the equivalent of one and a half month's rent in case of damage to the apartment or breach of lease.

A security deposit is sometimes called a "damage deposit" because it protects the landlord against such issues.

The Benefits of Collecting a Security Deposit

Landlords aren't legally required to collect security deposits from their tenants, but it's usually in their best interests to do so.

No one likes losing money. If a tenant knows her actions will determine whether she receives her full security deposit back, she'll be more likely to avoid damaging the property and will want to follow the terms of her lease.

A landlord can take deductions from the deposit in the event of damages rather than file a lawsuit against the tenant to pay for repairs. Because a security deposit is usually equal to at least one month's rent, it helps to financially protect the landlord if the tenant should stop paying.

Laws Vary by State

There's no uniform code for security deposits that covers the entire U.S. Each state has specific rules that apply to landlords and tenants, including the maximum amount a landlord can charge as a security deposit. There are also unique rules for how long you have to return or account for a tenant's deposit after he moves out.

Taking Deductions From the Security Deposit

Each state allows a landlord to take deductions from a tenant's security deposit, but permissible reasons for doing so can vary. 

The landlord should return the security deposit in full at the end of a tenant’s lease if the tenant has fully followed the lease agreement and has caused no damage to the property. Otherwise, a landlord might be permitted to keep some or all of the deposit to cover any losses.

Be careful with this if you, as the landlord, feel that any deductions should be made to pay for repairs. In most states, you're required to provide to the tenant an itemized list of repairs that were necessary, as well as corresponding receipts for the cost. You could potentially be sued if you don't or can't support your deductions, and you could end up losing not only the security deposit and compensation for damages, but court and attorney fees as well.

Keep in mind that you can't make deductions for repair issues due to normal wear and tear. Although the definition of what's considered "normal" can vary a bit from state to state, these damages typically include faded wallpaper or paint, as well as rug and carpet wear, particularly after a lengthy lease. Picture hooks and corresponding holes in the walls where prints or pictures were hung are usually considered normal, as are minor dents in the walls from doorknobs and faulty appliances if they haven't broken down from misuse or abuse.

Include Security Deposit Terms in Your Lease

It's important that a landlord include the terms of the security deposit in the lease agreement. Explain the amount of the security deposit, where the money will be deposited, the reasons you might make deductions from the deposit, and when and how the deposit will be returned to the tenant.

Provide a Receipt for the Deposit

Many states require that a landlord must provide the tenant with a receipt after collecting a security deposit. This, too, should include the amount of the deposit, the name and address of the financial institution where the deposit is being kept, and the annual interest rate the money will earn.

This interest rightfully belongs to the tenant, not the landlord, and most landlord will turn the extra money over to the tenant at year's end or adjust one month's rent to account for it.

Security Deposit Disputes

When a landlord and tenant disagree about deductions that have been taken from a security deposit, these disputes must often be taken to court. The best way for a landlord to win this type of dispute is to understand the security deposit laws in his state and to follow and document any actions taken relating to the deposit.