10 Tips for Handling Security Deposit Deductions

by | Aug 24, 2020 | Rental Property Management Tips

Security deposits are an important tool when it comes to quickly restoring a rental unit for the next tenant. But if security deposits aren’t handled correctly, they also can cause income loss. Watch out for these security deposit pitfalls:

1. Don’t assume the security deposit will cover all the damage from a bad tenant. With state and local limitations on deposits — typically capped at one-half to one month’s rent, the deposit won’t go far. Instead, focus on tenant screening to weed out the ones who have caused significant damage in the past.

2. If you find that you are needing to take deductions from tenants consistently, you may be doing something wrong. Review your tenant screening practices. Are you asking the right questions of the previous landlord references? Is the condition of the unit attracting unqualified rental applicants?

3. A security deposit only works if it is an incentive. The goal is not to claim the deductions, but to give back the entire deposit in exchange for a well-maintained rental unit. Don’t use language in the lease or communicate to tenants that they won’t be getting the entire deposit back — no matter what they do.

4. The security deposit is not the last month’s rent. Likewise, it should not be returned early. Do not agree to apply the deposit to outstanding rent or to return the deposit before the final walk-through — after the tenant’s belongings have been removed and you are certain there is no damage.

5. With roommates, do not return one person’s “portion” of the deposit if they leave early. Let the roommates work that out among themselves.

If one roommate leaves, the lease may legally terminate and everyone would need to vacate, or a new lease arrangement would need to be negotiated. Make sure there is no outstanding damage at that time, or it may be difficult to claim security deposit deductions later on.

It may be necessary to complete a new condition inspection report.

6. Landlords cannot take “standard” deductions from security deposits. Examples include a cleaning fee charged to every tenant whether or not the tenant returns the unit clean. Each deduction must be tied to the specific unit. The amount of the deduction is based on repairs needed to restore the unit to the condition it was in when the tenant moved in. A tenant cannot be charged the value of a new carpet if the carpet was eight years old when they moved in.

7. To claim a deduction, the landlord must show that the tenant caused the damage. With multiple tenants, it does not matter which one caused the damage, but the landlord must prove that the damage occurred during that lease term, not before. The only viable way to do that is with a move-in condition inspection report. The general practice is to leave that move-in report with the new tenant for a few days and ask the tenant to add anything else they find to the list, sign it, and return it to the landlord. That protects the landlord from subsequent claims that the damage was caused by a previous tenant.

8. When a tenant challenges a security deposit deduction, a landlord bears the burden of proving:
The tenant caused the damage;
The items are not ordinary wear and tear, and,
The amount of the deduction is reasonable.

Landlords are considered sophisticated when it comes to leasing matters and are held to a strict standard. Be prepared to prove each of these elements, preferably with documentation.

9. Taking wrongful deductions from a security deposit can cause income loss. Many states have enacted penalties to discourage landlords from taking wrongful deductions. For instance, a state may allow the tenant to collect three times the amount of the inappropriate deduction. Take $150 out for cleaning when it wasn’t needed, and you wind up owing the tenant $450. Take another $150 for throwing out a forgotten bag of trash, and you own the tenant $900. Keep that rolling, and it’s likely you will owe the tenant up to three months’ rent — three times the typical deposit.

10. Landlords who are renting out properties they have lived in themselves have a difficult time dealing with the inevitable scrapes and scars that occur from everyday use. The fact that the landlord personally chose the carpeting, never allowed anyone to walk on the floors with shoes, or paid a premium for high-end finishes will not have any bearing on the determination of whether a security deposit deduction was proper. Tenants are not held to the standard of exercising the same diligence that the property owner does. Tenants are not liable for everyday wear, only for damage caused by excessive use, misuse, or negligence.

Avoid the heartache of watching the rapid depreciation of high-end finishes in a private home turned rental property by planning ahead. Install finishes that are more durable, or plan to treat yourself to a remodel when you move back in. But don’t add to the income loss by pursuing deductions that are for normal wear and tear.

This post is provided by Tenant Verification Service, Inc., helping landlords reduce the risks of renting with fraud prevention tools that include Tenant Screening, Tenant Background Checks, (U.S. and Canada), as well as Criminal Background Checks, and Eviction Reports (U.S. only).

Click Here to Receive Landlord Credit Reports.

Disclaimer: The information provided in this post is not intended to be construed as legal advice, nor should it be considered a substitute for obtaining individual legal counsel or consulting your local, state, federal or provincial tenancy laws.

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