A security deposit is money paid to a landlord, lender, or seller as a sign of the tenant’s intent to move in and maintain the property.
Security deposits can be refundable or nonrefundable, depending on the terms of the lease, and they serve as a measure of security for the landlord or property owner.
If the tenant damages the rental unit or stops paying rent, the landlords can use the deposit to cover the monetary losses.
State laws vary regarding where landlords must hold security deposits, such as in a separate banking or escrow account, and whether they must collect interest while doing so.
How does a security deposit work?
Typically, a tenant pays a security deposit to their landlord before move-in, and it’s often the same amount as the monthly rent.
It can be used toward any repairs or appliance replacements in the rental unit if the damages were caused by the renter (or the renter’s guests).
If the lease indicates that the security deposit is refundable and the rental unit is in reasonably good shape (i.e, only shows signs of typical wear and tear), the landlord will typically refund the money upon the tenant’s departure.
Security deposits are not considered taxable income, and local laws often treat security deposits as trust funds, according to Investopedia.
Protect yourself from security deposit disputes with move-in and move-out checklists, which helps to keep record of the property during move-in and move-out.
TurboTenant allows you to customize, send, and store these condition reports, all digitally, within your free account.
Are security deposits mandatory?
Landlords aren’t required to collect a security deposit, though doing so is highly recommended.
Knowing that their deposit is at stake is enough incentive for most tenants to keep the rental unit in good shape.
That said, some landlords who feel extremely confident about their tenant’s screening report and background check may decide not to collect a security deposit.
If you’re on the fence about whether or not to require a security deposit, consider allowing your tenant to apply that money to their last monthly rent payment, assuming local laws permit it.
Investopedia notes that, “security deposits used as final rent payments must be claimed as advance rent and are taxable when paid.”
When is the deadline to return a security deposit?
Check your state laws to determine your specific deadline, but landlords generally have between 14-60 days after the tenant vacates the unit to make any deductions and return the security deposit.
After you’ve assessed the apartment for damages, made repairs, and calculated any unpaid rent or fees, you must notify the tenant in writing regarding any deductions you make to their security deposit.
Some states require you to provide receipts for any repairs to ensure the tenant knows you’re calculating the deductions fairly and accurately.
Generally, landlords return security deposits via mail in the form of a check, so be sure to get your tenant’s forwarding address once they move out.
What are the alternatives to a security deposit?
Moving into a new rental property can be expensive, especially when considering the amount of upfront fees your tenant might have to pay.
As such, some landlords allow other options to enable excellent potential tenants to move in without draining their bank account.
Three such options include:
- Lease insurance
- A surety bond
- A pay-per-damage agreement
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