Tip #18

Don’t Use the Deposit for Last Month’s Rent

Written on December 16, 2012 by , updated on June 8, 2014

Face of Jackson on Money

Jackson, looking worried about your finances

As a Landlord, never volunteer to accept the deposit as the last month’s rent.

On the practical side, if you use the deposit money for rent, what security do you have when they trash the property?

On the legal side, only a few states even allow the deposit to be used as rent money, and even then, there are strict rules that govern the disbursement of that deposit.

It’s messy and will make your taxes even more complicated. Just don’t do it. Further, if you don’t dot your i’s and cross your t’s, the tenant could sue you for not following the correct procedure.

Keep rent money separate from the deposit. Make the tenant fulfill all of the obligations of the lease, including payment of the last month’s rent. Then give the deposit back within the allowable allotted time, minus any damages.

photo credit: Thomas Hawk via cc
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7 CommentsLeave a Comment

  • Shawn

    So I understand what you mean, are you saying not to ask for first and last month’s rent when they move in? I thought that was common practice for apartments to do. Is it better to ask for a larger deposit and return that if everything is ok when they leave?

  • Lucas Hall

    I usually ask for a security deposit equal to one month’s rent. Some states even allow you to collect more. In California, you can collect up to the equivalent of 2 month’s rent, and then 3 month’s rent for a furnished unit.

    First months rent is usually collected at the lease signing, or at least before you give them the keys.

    I personally don’t like collecting last month’s rent simply because it tends to confuse tenants, and it also starts to make the costs with moving-in too high, and tenants will just go rent somewhere else. Also, if you collect last months rent, you might lose track of it in your bank account over the term of the lease. I recommend creating a separate bank account for each property, and keeping all the money separate from your personal funds and other properties.

    I prefer to collect a large security deposit, so that it will cover at least 1 month worth of rent if my tenant disappears plus enough for most common damages.

  • Jean Powers

    My tenants have given me proper notice, over 30 days, but when rent day came, no check. I reminded them it was due & not to be subtracted from deposit & they replied “empty pockets, we WILL use part of deposit for last month”. They have paid rent faithfully for several years & been good tenants, but I’m concerned about having shortage should something go wrong. What to do, please?

    • Lucas Hall

      Hi Jean,

      A tenant is not allowed to designate the deposit as last month’s rent – but as you can see, you can’t really stop them.

      The only thing you can do is to handle them as any other tenant who didn’t pay. Send them proper notice of non-payment (XX day notice to pay or quit). Depending on your state laws (http://www.landlordology.com/state-laws), you might be able to terminate their lease in as little as 3 days. If they don’t pay rent for that last month, then you need to get the unit back ASAP so you can re-rent it. Then if they don’t leave after the notice period has expired, you can file an eviction case.

      The chance of you actually getting through the courts before 30 days is slim, but at least the idea of having an eviction record might cause them to magically come up with the rent due.

      If not, and they wait it out, and then move within 30 days, you should still sue them for unpaid rent. You should use the deposit for damages to the property, and any unpaid rent, and then send them a bill for the rest. If they don’t pay, then you can file a small claims suit, and get a judgement for the rest.

      Above all, communicate this plan with them. Let them know that you take rent seriously, and if they don’t, you will take them to court.

      Good luck! Please know that I’m not a lawyer, nor is this legal advice.

      • Jean

        Thank you. This is answer I was expecting, but hoping that I could be less confrontational, based on a good history with them.
        Looks like I should serve tenants with the 3 days notice apologetically- regular procedure kinda thing- just as they informed me of no $ for rent with apologies.

        • Lucas Hall

          Hi Jean,

          I feel for you. That’s tough no matter how you slice it.

          Have you ever wondered why they ran out of money? Perhaps they lost their jobs. However, it’s more likely that they made the conscious decision to pay the security deposit on their next rental home instead of paying you. No matter how nice they are, they chose to pay someone else first. Just follow the procedures and don’t apologize – you didn’t do anything wrong.

          If you show them that you will take this seriously, terminate their lease early, and sue them damages, you might be amazed at how fast they come up with the money. Whenever I’ve done this, the tenants always seem to find it somewhere – sometimes their savings accounts, and other times they borrowed it from mom and dad.

          If you allow them to take advantage of you, they will.

  • Geraldine

    I went to tons of links before this, what was I thniinkg?

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