A security deposit gives a landlord some protection for their property if a tenant fails to uphold their end of a lease agreement. It is normally used to pay for damages that occur on a rental property, such as broken windows and doors, carpet cleaning, or other types of damage. You may also be able to use a security deposit to assist you when a tenant breaks their lease or leaves without paying their last month's rent.
However, many landlords are not familiar with how to handle a security deposit, or how much they can legally charge. There are many laws that govern security deposits, including laws concerning whether interest for the benefit of the tenant should be accrued. Be sure you brush up on state, local, and federal law regarding security deposits so you can avoid legal trouble. Your first task will be determining the amount of your security deposit. This should be enough to cover any damage sustained to your property while not exceeding any limits set by your state.
Some states prohibit charging more than one-and-a-half month's rent for a security deposit. If you are worried that potential damages might exceed this amount, insert a stipulation into a written lease agreement that will hold your tenant liable should excess damages occur.
Once you have settled on the amount of the security deposit, include this in your written lease agreement. State what will happen to this deposit should the tenant damage the property beyond normal wear and tear or if they elect to terminate your lease before it is complete. This will give your tenant a better understanding on how their money will be handled and what they need to do in order to have the deposit returned at the end of the lease.
Security deposits are not the same as pet deposits. A pet deposit is usually nonrefundable and is used to provide cleaning or repair of damage caused by a pet. If you allow pets on your property and require a pet deposit, state the difference in your lease agreement. This can help reduce confusion and let your tenant know what to expect when the lease term ends.
If you do not actually use the security deposit while the lease is in effect, you will not need to claim the amount as income on your tax return.
You may never experience a tenant trashing your rental property, but a security deposit can provide you with some peace of mind. While a problem tenant may cause more damage than the deposit will cover, you will at least have some help in repairing the damage.