Have more than one property? Our Ultimate Landlord Collection is worth purchasing/upgrading to. More Details.

Basic Rules For Returning Deposits

If you are familiar with renting property, you must be aware that holding and returning of deposits can look like a bit of agrey area. But this should not be the case considering that there are clear rules and regulations in each state for returning deposits. As a landlord, you must know what must happen once a deposit had reached you as well as what must be done in the event of a dispute in respect of that deposit. It is important to do some research and make sure that you understand how security deposits are supposed to be handled in the state that you come from. The rule of thumb is 30 days, but it is important to confirm if things are a little bit different in your state.

Security Deposit Is Not Your Money

This is an important concept about deposits that most landlords do not understand. The deposit money belongs to the tenant that gave it to you. What you are simply doing is holding it on their behalf. So when it comes time to return it, you need to make sure that you have that money readily available.

The Best Way To Hold Security Deposit

The most preferred way of holding the security deposit is in a legal escrow account. But as mentioned above, you need to understand that that is your tenant’s money. You are not supposed to use it to pay your bills or fund unfinished projects. You are also not supposed to put it in your general operating fund or use it if your tenant is one month late in paying their rent.

Unfortunately, a lot of landlords do not escrow the security deposits that tenants give them. Most of them hold it or just roll it into their general account and then claim that they will pay it back when the tenants decide to leave. Technically, this is not the right way to handle the security deposits. You need to isolate the deposit money into a separate account to avoid inconveniencing your tenants when they want to move somewhere else.

How To Return Security Deposit

In most states, you are supposed to put the deposits into a separate interest-bearing escrow account. You can hold as much security deposit as you want in that account the first year or first twelve months. But once that period has elapsed, you are allowed to hold only 30 days’ worth of security deposit. In case you had taken two months of deposit upfront, you will be required to return one of those to the respective tenants at the end of one year. You can keep the other. In case you kept more than one security deposit initially, you will be required to return one.

Once one year comes to an end, you will be able to hold in the interest-bearing escrow account more than one month’s security deposit. This is a very important element that is applicable in most states. Again, you must make sure that the deposits are kept in a separate interest-bearing account.

How The Security Deposit Interest Is Handled

In some states, Pennsylvania for instance, the landlord gets all the deposit interest during the first year. After twelve months have elapsed, all the interest that will be generated from the deposit is supposed to remain in the interest-bearing account and become the tenant’s money. The tenant will keep less than one percent of the interest from the deposit while the landlord can keep one percent. The one percent that the landlord will take generally covers expenses.

Returning The Deposit After A Tenant Moves Out

Once a tenant moves out of your property, let us say they move after staying in the property for one year, you will have up to thirty days to give them back the security deposit. You can give the tenant the deposit by first class mail or by personal delivery. If there are any deductions from the deposit, for instance to repair the damage that the tenant may have caused on the property, their needs to be an itemized statement showing those deductions. In case there is any unused portion of the deposit after the repairs, you need to return it to the tenant. You must also provide all supporting documentation such as bills, receipts, and invoices. If you fail to account for the security deposit, the tenant may sue you for the return of the deposit money. In case the tenant proves that you retained the deposit money in bad faith, the court may give the tenant a statutory penalty that is up to two times the amount of the deposit.