Property Management Accounting: (More About) Security Deposits
In our last post, we discussed how to properly account for security deposits in your financial holdings. Which bank account to deposit the security deposit into, and how and when to tax it as income is important, but is just the tip of the iceberg. Issues arise with the heft of details that lay beneath the surface.
Security Deposit Laws Vary by State!
There is no guarantee that the property you own is in the same state as you. Don’t assume that the security deposit laws are the same! You don’t want to be caught withholding funds due to overlooking a state law! Know the state (and city!) laws and ordinances that cover your property.
What is the Maximum Amount That Can Be Charged?
This amount can vary from one state to another, and there may be considerations for people over a certain age, tenants who have pets, and how long of a lease is being signed. Deposits normally range between one and two month’s worth of rent as a base.
In many states (such as Texas) there is no legal limit to what can be charged for a security deposit. However, the standard is one month’s rent plus any pet deposits that are due. Keep in mind that city ordinances may also set local limits on security deposits.
How Much of the Security Deposit Can I Keep?
Property managers everywhere have, at some point, struggled with a tenant over charges upon move-out. It’s important to know that normal wear and tear on a property cannot be considered damage that is deductible from the security deposit. If a carpet is worn from years of tenants living in a property, that is to be expected. However, if a pet damages or stains the carpet, that is abnormal wear and tear and can be deducted.
All reasonable charges for abnormal damages must be itemized and documented in a letter, for both your records and for the tenant. Under Texas law, if there are any deductions from the security deposit, this accounting letter must be sent to the tenant’s forwarding address with the remainder of the security deposit (if any) – or the bill if charges were in excess of the security deposit.
The goal is not to keep as much of the security deposit as you can – the security deposit is entrusted to you in good faith that it will be used to cover damages to the property upon move-out. This is why the security deposit is not considered income until after the damages have been assessed and the remainder returned to the tenant. It should be equal to, not more, than the cost of repairs needed.
When Do I Return the Security Deposit?
In Texas, the security deposit must be sent to the tenant within 30 Days of receiving the tenant’s forwarding address. This is to allow time for a final walk-through and assessment of the property. An exception to this is if the tenant vacated the property while owing rent, you do not have to send an itemized list of deductions.
There are penalties for landlords who do not return the security deposit promptly when due – if a tenant becomes litigious, they can rightfully be awarded $100, three times the security deposit, court costs and attorney’s fees. A big price for what could be a simple mistake!
Can a Tenant Use their Security Deposit as Last Month’s Rent?
The short answer is no.
While it is legal in some states, it is inadvisable to your business as a landlord. Security deposits may not cover one month’s rent if rent increased over the tenancy. You would be cutting yourself short in that regard. Furthermore, if there are damages beyond normal wear and tear, then the tenant will still be responsible for those charges but you will not have easy access to funds and may be stuck out in the cold, or have to take your tenant to small claims court.
In Texas, it is outright illegal for a tenant to withhold payment on the presumption that their security deposit can cover last month’s rent. The penalty to the tenant for this is three times the monthly rent, and whatever court costs and attorney fees were incurred by the landlord’s suit to recover the rent.
Landlords will be faced with these questions lease after lease. It’s in your best interest to stay informed, maintain orderly accounts, clearly state your expectations in your lease, and to abide by the laws that govern your property!
If that’s a bit daunting, team up with Frontline Property Management! We have an on-point accounting department and a full staff of professionals and Property Managers who stay up-to-date on the latest regulations and will handle all of the details so that you don’t have to!