The Ins and Outs of Security Deposit Deductions: Key Points to Understand

security deposits deductions

While security deposit laws vary by state, landlords and property owners are generally allowed to keep some or all of a deposit for damages or amounts owed rent or utilities when a tenant moves out. There are situations when a tenant can take legal action for security deposit deductions, so it’s critical to understand what conditions justify withholding these funds.

This blog explains what can and cannot be deducted from a security deposit and shares tips to facilitate fair and transparent refunds.

What Can the Landlord Deduct from a Security Deposit?

A security deposit (also called a damage deposit) is typically returned at the end of a lease if the rental unit is in good condition and the tenant follows all of the terms of the lease agreement.

When this doesn’t happen, you’re allowed to take money out of a tenant’s security deposit. Here are some common reasons for security deposit deductions.

Excessive Property Damage

Landlords shouldn’t deduct for normal wear and tear—like minor scuffs on the wall or faded paint. However, substantial damages or repair costs can be deducted from the security deposit.

Examples of property damage for deductions:

  • Broken windows
  • Damaged window shades
  • Broken cupboard doors
  • Burns in carpet
  • Burns in curtains
  • Stains on carpet and curtains
  • Non-functioning smoke detectors
  • Damaged appliances
  • Broken doors

Unpaid Utilities

A tenant may not be entitled to receive the full security deposit at lease end if they have unpaid utility bills. You can use security deposit money to pay outstanding bills for electricity, water, and gas if these utilities are required as part of the rental agreement.

Nonpayment of Rent

Most state laws on security deposits allow you to keep all or a portion of a deposit for rent owed at the end of a lease. Unpaid rent is considered a breach of a lease agreement. Some states also allow deposit funds to be used for late fees.

Cleaning Costs

If the tenant doesn’t clean the property sufficiently upon moving out, you can use the security deposit for cleaning costs. This includes professional cleaning services for carpet cleaning, animal stains, dirty curtains, and excessive dirtiness.

Abandoned Items

You might have to deal with large items left behind by tenants. You can deduct the disposal costs from your security deposit. Encourage tenants to take all their stuff with them or dispose of it responsibly to avoid this charge.

Lease Violations

If a tenant ends the lease without proper notice or reason, you can withhold part or the entire security deposit, depending on the rental agreement terms and local landlord-tenant laws.

How to Avoid Security Deposit Disputes

Follow these tips to safeguard yourself from potential disputes over deductions from security deposits:

  • Documentation of Property Condition: Do an inspection to document property condition before a new tenant moves in. This makes it easier to figure out damages when the lease ends. Takes lots of pictures and videos to have a clear record of the condition of the walls, floors, appliances, lights, doors and all other fixtures.
  • Clear Lease Agreement Terms: Ensure your lease agreement outlines what can be deducted from the security deposit. You can also provide a security deposit deductions list beforehand.
  • Explain security deposit deductions: Discuss common reasons for security deposit deductions upfront with tenants. This will ensure both parties adhere to the lease terms, providing a hassle-free experience.‍

If you’re wondering about security deposit requirements in your state, find all the details in our comprehensive guide here.

What Can’t a Landlord Deduct from a Security Deposit?

As a landlord, it’s important to know the difference between tenant-caused damages and ordinary wear and tear that you’re not allowed to deduct from rental security deposits.

Reasonable wear and tear includes:

  • Natural Fading: Deposits can’t be used for faded curtains, paint, and wallpaper.
  • Routine Replacements: Changing smoke detector batteries is not considered a reasonable deduction.
  • Minor Wall Damages: Small nail holes in walls from hanging pictures don’t qualify as damage on walls.
  • Temperature Effects: If weather changes result in warped doors or warped windows, you must fix these damages.
  • Regular Carpet Use: Deposit damages don’t include general furniture scuffs on the carpet.
  • Appliance Breakdowns: You can’t use a deposit toward repairs for appliances that break down due to age.
  • Old Plumbing: No deductions for damages can be made for old plumbing issues, like clogged drains or sinks.

Make sure you only charge for excessive damages caused by tenant negligence or misuse. Damages resulting from not addressing repair or maintenance requests cannot be deducted from a deposit.

Tips for Fair Security Deposit Refunds

It’s important to be clear and transparent with tenants if you keep some or all of a deposit for reasons outlined in the lease terms and local security deposit laws. Here are some guidelines on how to handle security deposit returns.

  • Conduct rental unit inspections: Make a list and take pictures of damages when tenants move in and get them to sign this document. Repeat this process when tenants move out.
  • Require adequate move-out notice: Specify the notice period required for moving out in the lease agreement, which can be 30 to 90 days.
  • Provide a list of deductions: Most states require landlords to give tenants an itemized list of every security deposit deduction and how much it costs.

Return deposits to tenants: Landlords generally have a 30-day window to return security deposits to tenants at the end of a lease, provided they have followed all the terms of the lease agreement.

Final Thoughts

Security deposit deductions can help protect your rental property investment, but managing these funds can be a hassle. Baselane offers security deposit accounts for landlords to help simplify collecting and returning deposits.

Open multiple Baselane banking accounts per property to hold security deposits without paying any hidden account fees or minimum balances. Plus, you’ll earn up to 4.19% APY interest and up to 1% cashback.

Sign up for a free Baselane banking account today to easily collect security deposit funds via bank or wire transfers, debit cards, credit cards, and checks.

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Financial Technology, Real Estate Investing, and Property Management, Accounting and Tax, Finance
Saad started his career as a Certified Public Accountant (CPA) working for a top-tier accounting firm. He was responsible for helping audit alternative investment funds. He later worked at a hedge fund where he was responsible for preparing financial statements and implementing new technology. He also ran a successful private tax practice for five years.

After completing his MBA at Duke, Saad joined The Boston Consulting Group to do management consulting. At BCG his experience spanned several industries and growth projects across Pharma, Retail, and Technology companies. His passion for democratizing finances led him to Plaid, a fintech, where he worked with large Banks and Financial Institutions to make finances and money easier for all.
security deposits deductions
The Ins and Outs of Security Deposit Deductions: Key Points to Understand