Your Security Deposit

What is a security deposit?

A security deposit is an amount of money given by the tenant to the landlord to ensure that reimbursement is available for any damage done to the premises by the tenant. Many landlords demand a security deposit before a tenant moves in. This deposit protects the landlord from financial loss if the tenant fails to pay the rent, causes damage to the property, or does not clean up properly when he leaves. Except for units renting for more than $2,000 per month, security deposits and prepaid rents may not total more than two months’ rent. Some leases require additional deposits for pets or waterbeds.

State laws require the return of the security deposit within a certain period of time. If the entire security deposit is not returned, the landlord should provide the tenant with a written explanation regarding any deductions made from the security deposit. Some states have laws with steep financial penalties for landlords that fail to return the security deposit within the amount of time allowed by law. A security deposit typically cannot be credited toward the payment of the final month’s rent. Some state laws require the landlord to keep the security deposit in a separate interest bearing account.

Where are deposits kept?

Deposits and prepaid rent must be deposited by the landlord or the property manager in a trust account in a bank or savings and loan association, or with a licensed escrow agent. A trust account can be any separate savings or checking account labeled “trust account” and used only for deposits and prepaid rents. A receipt should be written whenever the tenant pays a deposit or prepays rent.

Landlords are required to provide tenants with the terms and conditions under which prepaid rents or deposits (or any portion of those monies) might be withheld by the landlord.

Can deposits earn interest?

The landlord/tenant law does not require that the trust account earn interest, but if the tenant’s deposit does earn interest, the tenant is entitled to the interest under general trust law principles, unless both parties have agreed otherwise. It is a good idea to specify in the rental agreement whether the deposit will earn interest, and if so, who gets the interest. If the property is managed by a licensed property manager, the interest on the tenant’s money in the trust account must go to the tenant, under the terms of the real estate license law; unless the tenant agrees in writing that the interest may go to the property owner. The property manger may not keep the interest.

See also…

Landlord vs Tenant Issues