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Handling security deposits is one of the most rule-specific parts of a landlord’s financial world. Every state has particular rules that govern everything from the allowable amount to charge in a security deposit to how it must be held to when and under what circumstances all or part of it should be returned.
To reduce your liability regarding security deposits, start by avoiding these common mistakes. Check the rules in your state and locality for your “final guide” to how to handle tenant security deposits.
1. Failing to document.
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), write it down. When a security deposit is paid, specify that the funds are intended as a security deposit, note the date and amount, and indicate where the security deposit is being held.
Many states require security deposits to be kept in special accounts and that the tenant be informed where the account is held. The more regularly and clearly you document financial transactions, the better protected you are if a dispute arises later – or if you face a tax audit.
2. Landlord spent my security deposit
In most places, the security deposit belongs to the tenant. The landlord may spend it only on certain specific items, like damage beyond ordinary “wear and tear” or back rent. Trying to keep part or all of the security deposit to cover new appliances or (in some places) cleaning 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 the security deposit when the tenant breaks a lease.
It’s a common mistake by inexperienced landlords: a tenant leaves early and the landlord simply keeps the security deposit, reasoning that they are entitled to it in light of the tenant’s bad behavior and the expense of finding a new tenant. In fact, in most cases, the landlord has a responsibility to return the security deposit in the same manner they would if the tenant had left at the end of the lease.
4. Failing to follow the rules for returning security deposits.
Prompt notice, itemized lists of damages, “waiting periods” for tenants to dispute any withheld portion of a security deposit. The list of rules for when, where, how, and why a security deposit must be returned (or withheld) is long in any state or city. Failing to follow it, 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.
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.