What Is Security Deposit?

Security deposits are one of the most important financial tools you have as a landlord. They protect you from damage, unpaid rent, and tenants who skip out on their lease. But they are also one of the most regulated parts of being a landlord.

Get security deposits wrong and you could owe your tenant double or triple the amount back, plus their legal fees. Get them right and you have a safety net that makes managing rentals significantly less stressful.

How Security Deposits Work

Before a tenant moves in, they pay you a lump sum (usually equal to one month's rent) as a security deposit. You hold that money for the duration of the lease. When they move out, you inspect the unit and either return the deposit in full or deduct for damages and unpaid rent.

The key word here is "hold." This is not your money. It is the tenant's money that you are holding in trust. You cannot spend it, invest it, or mix it with your rental income. Many states require you to keep it in a separate bank account.

How Much to Charge

Every state has different rules on how much you can collect. Here are some common limits:

• California: 1 month's rent (as of July 2024)
• New York: 1 month's rent
• Texas: No statutory limit (but market standard is 1 month)
• Florida: No statutory limit
• Illinois: No statutory limit (Chicago has its own rules)
• Colorado: No statutory limit

Even in states with no legal cap, charging more than 1-2 months of rent will scare away good tenants. If your unit rents for $1,500 per month, a $1,500 security deposit is standard. Charging $3,000 when the law allows it will cost you applications from qualified renters.

What You Can Deduct From a Security Deposit

When a tenant moves out, you can typically deduct for:

• Unpaid rent. If they owe you $600 for their last month, that comes out of the deposit.
• Damage beyond normal wear and tear. A hole punched in the wall is deductible. Scuff marks on paint after 3 years of living there are not.
• Cleaning costs. If the unit requires professional cleaning beyond what is reasonable, you can deduct it. A dirty oven is arguable. A unit with trash piled in every room is clearly deductible.
• Unpaid utilities. If the lease says the tenant pays electric and they left an outstanding balance, some states allow you to deduct this.

The critical distinction is between damage and normal wear and tear. Worn carpet in a high-traffic area after 5 years? Wear and tear. A giant pet stain and torn carpet after 6 months? That is damage. Your move-in checklist is what proves the difference.

The Move-In Inspection Is Everything

Take photos of every room, every wall, every appliance before the tenant moves in. Have the tenant sign a condition report. This is your baseline. Without it, you have zero leverage when it comes time to make deductions.

I take 30-40 photos per unit on move-in day. I email them to the tenant the same day and ask them to confirm. This takes 20 minutes and has saved me thousands in deposit disputes.

When they move out, do the same thing. Compare the move-out checklist photos to the move-in photos. The evidence speaks for itself.

Returning the Deposit: Deadlines Matter

Every state has a deadline for returning security deposits after move-out. Miss it and you could lose the right to make any deductions at all. Some states impose penalties of 2x or 3x the deposit amount.

Common return deadlines:

• California: 21 days
• New York: 14 days
• Texas: 30 days
• Florida: 15-30 days (depends on whether you are making deductions)
• Colorado: 30 days (can be extended to 60 in the lease)

Along with the refund check (or the portion you are returning), you must send an itemized list of deductions with receipts. "Cleaning: $200. Wall repair: $150. Unpaid rent: $600." Be specific. Vague deductions get challenged in court and you will lose. Read more about the rules in our security deposit return laws guide.

Common Mistakes Landlords Make

Commingling funds. Keeping deposit money in your regular checking account is illegal in many states and sloppy everywhere else. Open a separate savings account labeled "Security Deposits" and keep every deposit there.

No move-in documentation. Without photos and a signed condition report, your deductions are just your word against theirs. You will lose in small claims court every time.

Missing the return deadline. This is the number one reason landlords lose deposit disputes. Put the move-out date in your calendar with a reminder 7 days before the return deadline. Your lease agreement should spell out the process clearly.

Deducting for normal wear and tear. Paint fading after 4 years is not damage. Carpet wearing thin in the hallway is not damage. If you try to charge tenants for these things, you will end up refunding the full deposit plus penalties.

Not collecting enough. If your state allows 2 months and you only collect 1, you are underinsured. A bad tenant can do $3,000 in damage to a $1,500/month apartment easily. Collecting the maximum allowed gives you more protection.

Frequently Asked Questions

How much can I charge for a security deposit?

It depends on your state. Most states cap security deposits at 1-2 months rent. California and New York cap it at 1 month. Texas and Florida have no statutory limit. Always check your local laws before setting your deposit amount.

Can I use a security deposit for unpaid rent?

In most states, yes, but only after the tenant has moved out. You typically cannot apply the deposit to unpaid rent while the tenant is still occupying the unit unless your lease and state law specifically allow it.

Where do I keep security deposit money?

Many states require a separate bank account, sometimes interest-bearing. Even in states without this requirement, keeping deposits separate from operating expenses is smart business practice and keeps your accounting clean.

What if damages exceed the security deposit?

You can send the tenant a bill for the difference and pursue them in small claims court if they do not pay. In practice, collecting beyond the deposit is difficult. This is why thorough tenant screening up front is so important.