Many landlords are hesitant to collect a security deposit (SD) from tenants because they fear it is too much money for someone to pay. While I completely understand the sentiment and extending a helping hand….security deposits are designed to help you (the landlord) in the event your tenant damages the property.
The following covers some major points of security deposits as they pertain to landlords.
How much can you ask for?
You must strike a balance, requiring a deposit that sufficiently insures against potential damage but that does not overburden your new tenants. In the state of Massachusetts, the maximum amount you can request is equal to one month’s rent.
You must charge the same security deposit rate for all tenants so as not to trigger a discrimination issue. For example, you cannot charge your first floor tenant a $500 SD because you felt sorry for him and your 2nd floor tenant $1000 for a SD because you knew they could afford it. If unit 2 found out and decided to sue you, it would be their legal right to do so and win because you did in fact discriminate.
How should funds be held?
Security deposits remain the legal property of the tenant until a triggering event, such as damage to the unit, occurs. Security Deposts are to be held in an interest bearing account (also called an escrow account) at your local bank. You will need a W9 for the tenant so that any interest earned on the account can be reported to the government (Yes, you can be taxed on interest). If you fail to comply and your tenant pursues it, you will be forced to pay 5 times the amount. I say…follow the law and avoid the headache.
When can you keep the deposit?
Your lease agreement should clearly spell out which situations would warrant retaining the tenant’s security deposit; otherwise, the tenant may have a strong case against you for wrongful withholding of tenant funds. Some legitimate reasons for withholding some or all of the SD may include the following:
- Failure to pay rent
- Damage to the property
- Damages exceeding normal wear and tear
- Unpaid utilities
- Removal of abandoned property
- Cleaning costs
In nearly all states, you must provide an itemized list in writing detailing the costs of the expenses. If the tenant disputes the list, he or she may initiate a lawsuit in housing court, which would require you to prove that damage occurred and that repair costs were congruent with the amount withheld.
How soon should you return the deposit?
You must return unused security deposit funds within 30 days of the tenant moving out, keeping in mind that these funds legally belong to the tenant unless a triggering event has occurred.
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