Common Concerns When Returning Security Deposits

It’s a tale as old as time. 

Your tenant’s lease is up. They have most of their stuff packed. They’re ready to move out in a few days. 

And if they haven’t damaged your property, it will soon be time to return their security deposit. 

Security deposits are a critical part of the rental business. They hold tenants accountable and provide an incentive for them to treat your property with respect.  

They also give you a safety net, in case serious damage does occur. 

But what are some common concerns you should keep an eye out for before returning the security deposit? 

Let’s look at five of them below. 

Concern #1: When can you keep a security deposit? 

A security deposit is a safety net in case something happens. You want to operate as though you will return it to your tenant. But an important question often asked when leasing is: When can a landlord keep a security deposit? 

Security deposits are only intended for damages that go beyond normal occurrences. Regular wear and tear doesn’t give you the right to use the deposit. Things like fading paint, frayed carpeting, and aging appliances don’t warrant use of the deposit. 

That said, things like cracked and severely scratched floors, broken appliances, unpaid utilities, and structural damage may let you keep the security deposit. The specific rules governing what a security deposit can and cannot be used for depend on state and local laws. Most of these laws, though, have similar guidelines for what constitutes damages that allow you to hang onto security deposits. 

Generally speaking, there are five major instances where you can keep a security deposit: 

1. Significant damage to the property is the first instance. This means there are large holes in the walls or big stains and burns on the carpet. Something noticeable and well beyond normal wear and tear is usually the signifier.   

2. Cleaning costs that account for excessive trash or messiness left behind by the tenant account for the second instance. A security deposit cannot be used for regular cleaning, but if more cleaning is necessary because of the tenant’s negligence, that can often warrant you using the deposit. 

3. Nonpayment of rent is the third instance. This is very straightforward. In most cases, if a tenant doesn’t pay rent, you can apply the security deposit toward the missed payment.  

4. A tenant breaking their lease is the fourth instance. As with the others, this depends on local and state laws, but typically these circumstances allow you to keep the security deposit. 

5. Unpaid bills and utilities account for the last instance. Once again, you’ll need to research state and local laws, but this one typically warrants you keeping the security deposit as well.  

Concern #2: How soon must you return a security deposit? 

Once the tenant moves out, you only have a certain amount of time to check the property, receive quotes on needed repairs, and let the tenant know if anything will be withheld from their deposit. 

The exact number of days you have to return the deposit depends on state and local laws. For example, Ohio requires you to return the deposit within 30 days after the tenant moves out. A security deposit not returned within 30 days will leave you open to legal recourse. Some states might allow more or less time than that, so you must get familiar with state and local regulations.  

For the most part, all state laws about security deposits include exact timelines for the following: 

• Sending tenants an itemized list of withholdings 
• Notifying tenants on how much of their deposit they’re getting back 
• Returning the rest of the security deposit 
• Returning any interest gained on the security deposit 

You will be in hot water if you don’t make it a point to follow specific state requirements regarding the time you have in each of these instances. Stay organized and on top of things and you won’t have to worry! 

The key here is to review your state and local laws. Figure out how much time you have to return the deposit and make sure you take action before the due dates. 

Concern #3: Should you keep the deposit separate from your other funds? 

You absolutely should keep your deposit separate from other funds. This will help immensely when it comes time to return the deposit. Remember, you need to operate as though you’ll be returning the deposit in full. Don’t treat it like it’s your money. 

Many states even require that you collect interest on behalf of your tenant. If you do this, you will have to return the security deposit with interest. This becomes quite difficult to calculate if the deposit is commingled with personal funds.  

It’s wise to keep security deposits in a separate checking account. This way, you can issue deposits directly from the relevant account. And your books will remain straightforward. 

It’s usually not the best idea to keep deposits in savings accounts because you will have to transfer money to and from a checking account if you need to issue refunds via check. This creates extra work and isn’t as easy to track. 

Concern #4: What else should you know about returning the deposit? 

Clarity and proactive communication are key. Be upfront about setting proper expectations with your tenant on what they need to do to get back their security deposit. For instance, if you turn the property over to your tenant with professionally cleaned carpets, you may require the tenant to return it in a similar condition.  

Taking before and after pictures is a great strategy. It provides an unbiased view of the property to help determine the home’s condition before the tenant moved in and after they left.  

Conclusion 

These are some common concerns about returning security deposits, but they don’t need to create issues. If you follow the advice above and do your research, you should be just fine. 

It’s important to remember that a security deposit is a safety net, so you should operate as though you will need to return it.