How to Handle Security Deposits Properly

Written on May 6, 2014 by , updated on October 13, 2014

Don't Commingle DepositsIt’s not only wise to keep separate bank accounts for each property’s security deposits, but in most states, it’s required by law.

What’s a Deposit?

Since the dawn of time, landlords have been taking “security” or damage deposits from tenants to insure against potential property damages.

Centuries ago, a tenant could offer a promissory note against crops, livestock, or even children as a damage deposit. (Imagine that!)

Now, however, landlords require tenants to provide the money up front, usually one or two month’s worth of rent. This money is then held by the landlord until the end of the lease, and returned if there are no damages.

Problems with Commingling Funds

Technically, the security deposit money does not belong to the landlord. It’s on loan, while the tenant lives in the rental property.

The landlord must keep it safe until it is time to either to offset damages or return it to the tenant.

When a landlord keeps the deposit in the SAME account as his/her personal funds, or other deposits, three common issues arise:

Problem #1: Lack of Tracking

The deposit becomes almost impossible to track and validate in a court of law. In many states, commingling of funds can forfeit a landlord’s right to claim any of the deposit.

Problem #2: Accidental Spending

The deposit might accidentally get spent on a haircut for the landlord’s fluffy toy poodle, Louis Vuitton.

Problem #3: Interest Accrual

Since the security deposit does not belong to the landlord, many states require that a landlord collect interest on behalf of the tenant. This becomes nearly impossible to calculate if the deposit is commingled with personal funds.

Some states, such as Pennsylvania, allow the landlord to keep part of the interest as an “administrative fee,” but other states require every penny that the deposit earns in interest be given back to the tenant.

The Solution: Separate Accounts

Most independent landlords don’t realize the importance of this basic accounting technique.

I have a bank account for each property. I ONLY use these accounts to hold money that does not belong to me, such as deposits.

Remember, when a tenant gives a deposit, the landlord has a responsibility to hold it for safe keeping, and sometimes even collect interest for the tenant.

Structuring the Bank Accounts

There are a dozen ways to organize your bank accounts. Because I manage my own properties (and only my own), the method that has worked best for me is to have one rental operating account for all my properties, and then a separate account for each property’s current security deposit.

With that said, I’m not an accountant or a lawyer, but this method satisfies most state laws that I’ve seen.

For example, if you own three rental properties, you might have the following bank accounts:

  1. Personal Checking
    Date nights, personal mortgage, kids’ shoes, and haircuts for Louis.
  2. Personal Savings
    Emergency fund for your family, vacation savings, orthodontia for the kids, etc.
  3. Rental Operating Checking
    Repairs, maintenance, and mortgage expenses for ALL your rentals. You can track each property’s expenses in a separate ledger.
  4. Rental Property #1 – Security Deposit Checking Account
    The only money in this account is the security deposit for property #1.
  5. Rental Property #2 – Security Deposit Checking Account
    The only money in this account is the security deposit for property #2.
  6. Rental Property #3 – Security Deposit Checking Account
    The only money in this account is the security deposit for property #3.

By keeping the security deposits in their own CHECKING accounts, you are able to issue deposit refunds directly from the appropriate account by writing a check – thereby keeping your books nice and clean.

I would not recommend keeping the deposits in savings accounts, because you would be forced to transfer money to and from a checking account in order to issue refunds via check. This defeats the purpose of keeping the money separate.

What Does the Law Say?

Here are some great examples.

Florida, for example, specifically prohibits landlords from commingling funds.

In Kentucky, the landlord loses the right to withhold ANY money from the deposit if he/she doesn’t store it in a separate account.

Pennsylvania only dishes out interest to tenants after the 2nd year of tenancy is complete, but also gives landlords a piece of the pie.

In Washington, the landlord gets to keep the interest, but it’s still a good idea to keep the funds separate.

Not your state?  

We’ve got you covered. Click on your state to learn more about rental laws that affect you.

What About You?

What technique do you use when handling security deposits? How do you organize all your bank accounts in relation to you rentals?  Let me know in the comments below.

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37 CommentsLeave a Comment

  • Amanda Price

    Sometimes, I can’t help but wonder if landlords have lost their hearts and unfortunately, I haven’t met anyone quite decent enough – if you know what I mean. Of course, they are in business and not a charity or else, they would run shelters instead. Those petty fights over trivial stuff make you want to lose faith over humanity though. I’m curious what your thoughts are in using alternative dispute resolution just in case your landlord doesn’t want to return your security deposit? Just read something about eQuibbly and those click justice services. Thanks!

    • Lucas Hall

      Hi Amanda

      I’m really sorry you are going through this. Please don’t get me wrong but your comment is funny to me b/c I’ve heard lots of landlords say the same thing about tenants. I think bad people are just bad people regardless of their career choice.

      As for eQuibbly, I’ve never heard of it so you might want to look for some honest reviews before spending $145.

      Also, counseling and dispute resolution services only work if both parties want to participate. I’ve found that if a landlord holds a deposit unfairly, he/she is NOT going to want to participate in eQuibbly or anything like it.

      The formal way to handle this is to take your case to small claims court. Small claims cost anywhere from $50-$300 to open a case but if they are able to serve a summons to the landlord, he will be FORCED to show up for court.

      Check our state law pages to see what other rules he might be breaking. http://www.landlordology.com/state-laws

      Good Luck and please do let me know how it goes!

  • Fabio Leggio

    It is my understanding that in Pennsylvania the penalty for commingling a residential tenants security deposit is 3 times the deposit or 3 months rent in a court of law. I was told this by a Investor Realtor that teaches investment class. He uses the term Redecorating fee. Does anyone know if there is any truth to this?

  • NMSeufert

    We just inherited two six family units. We are sorting through the all of the files (no computer files) all notebooks.
    Anyway, many of the leases state “no security deposit” or “security deposit w/o interest” We started asking questions as to the reason they were not deposited into an interest accruing account. The reasoning being that the banks interest per year is on average 0.05%, if we subtract the administration yearly fee each, which is 1%, the tenants actually lose money.
    Are we missing something? How do others handle security deposits?

    • Lucas Hall

      Hi there,

      Every state requires that landlords handle deposit interest and escrow accounts differently. Some don’t require the landlord to pay the tenant interest or keep it in a separate account – although that is clearly the wise thing to do. Other states set the exact % that must be collected.

      I suggest checking your state laws here: http://www.landlordology.com/state-laws

      We have outlined many of the states, and how they require interest to be collected – in at all

  • Mark

    Hi Lucas, hope you can provide some advice on a security deposit question. We rented a house for 4.5yrs from an agency in NC. 9/2014, the owner informed us that he was going to sell the house and removed the house from the agency and I paid rent directly to him. 12/2014, he informed me via email that we had to leave the property by the end of 2/2015. During March, I inquired about the security deposit and was told it would be mailed 3/14. No check, inquired again, was told it would be sent out and on 4/2, we got a check (over the 30 window).

    2 issues, he misspelled my last name on the check and also kept $290 of the deposit. There was no notes with the check on why he held back any portion of the deposit and never informed me that he was taking any of the deposit. What right or recourse do I have at this point?? Thanks!

    • Lucas Hall

      Hi Mark,

      Usually, a landlord must provide an itemized list of deductions. But you’ll need to check your state’s laws to be sure that your state requires it (some don’t). http://www.landlordology.com/state-laws/

      Sometimes, you can just correct the check and your bank will take it – even with the misspelling. If not, you’ll need to get another check. If you think the landlord missed the window to return the deposit and wrongfully withheld anything, then your have a couple options:
      1. Confront the landlord and try to get some additional money back
      2. Take the landlord to small claims court, and perhaps you’ll win – and get your money back (sometimes 2x or 3x)

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

      • Mark

        Thank you for the follow up Lucas!! Yes, in NC, the landlord must provide an itemized list within 30 days of any monies being withheld. I went back to the landlord and requested a new check with the correct last name and full amount to be returned to me, via overnight mail. Not sure if this will happen!!

  • Diane Gingras

    Can we also get information for Canadians or is this just in U.S. ?

  • Branden Thompson

    Hi I’m renting a house off someone the tub doesn’t drain. I have told the land lord a month after we moved in,it was backing up.The lease was supposed to be until September but she wants us to move out by the end of July.I moved into this house with no oil in the tank I put 100 gallons in only used 80 she wants to keep that Plus last month’s rent plus security.She also has came in my house why I was sleeping and plugged her pressure washer in and used my hot water for four hours on her house my 2 year old son almost got out because of the door being opened.She said she has pumped the septic but was trying to use a metal detector to find it. She than told Me it was supposed to be replaced 7 years ago.She’s very rude and comes and goes as she pleases

    • Lucas Hall

      Hi Branden

      How can the landlord terminate the lease early for no reason? They usually can’t do that. Further, the landlord can only withhold a deposit for any actual damages (financial or material), such as unpaid rent, or excessive physical repairs.

      Next, in most states, a landlord is required to give “proper notice” before coming over, and can get in a lot of trouble if they don’t. Check out our state laws guide pages to learn more about the state laws that apply to you: https://landlordology.com/state-laws

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

  • Felicia Arrington

    My landlord asked for a copy of my husband and my social security card and Id along with a copy of a bill. When I asked for what she stated it was to put my security deposit in an account. I have never heard of this before. Does this make sense to you as I am not comfortable giving copies of these documents with all of the identity theft going on.

    • Lucas Hall

      Hi Felicia

      It’s very common for landlords to ask for the SSN to screen potential tenants, but I’ve not heard of it for deposit holdings. Maybe he’s creating a true escrow account and it will have you listed as possible owners (which is a good thing).

      At the end of the day, don’t give your SSN out unless you fully understand the situation and are comfortable with it. ID theft is at an all time high for sure.

      • jane

        Banks in Massachusetts require tenants to complete a W9 (which includes the SSN) in order to open an escrow account. In this way, the account truly belongs to the tenant, and not to the landlord.

  • Sara

    Hi Lucas,

    Thanks for the great info. I am about to close on a triplex, and wondering how you would handle the account for security deposits. Would you recommend having ONE interest-bearing savings account with a sub-account for each unit, or having THREE separate interest-bearing savings accounts for each unit?

    Second, MN law requires one percent interest on security deposits. I’m having a hard time finding checking accounts that yield interest unless you have a huge balance. Do you see any issue with keeping each deposit in a savings account, and then transferring it to the property checking account right before refunding it?

    Thanks!

    • Lucas Hall

      Hi Sara,

      I’ve always been of fan of having a separate (free) bank account for each unit. This is realistic as long as you don’t have too many units. But it’s perfectly acceptable to have a single deposit account for all deposits. You just have to decide what’s best for you.

      Plus, whether you are required to collect interest depends on your state laws. It looks like MN does require it: https://www.landlordology.com/minnesota-landlord-tenant-laws/

      I’d suggest trying a money market savings account with check writing abilities. You can usually write up to 6 checks a month from it (even though its a savings account), and it accrues a lot more interest than any checking account. I personally think Ally has a great product: https://www.ally.com/bank/money-market-account/

      I don’t recommend transferring the money to your personal checking because that could be construed as “commingling”.

      I hope that helps!

  • T

    Hi Lucas,

    First, thanks for all the info, it’s been extremely helpful!

    I was wondering if there is a technical or legal difference between the terms “damage deposit” and “security deposit”? I’m under the impression there isn’t. But we know another landlord who says there is, and that you should have both in your lease, each for a different amount. Personally, I think he might be complicating things and possibly pigeon-holing himself. Are the terms “damage deposit” and “security deposit” the same thing? Or is there a legitimate difference?

    Thank you!

    • Lucas Hall

      Hi T,

      I’ve always considered those terms to be the same thing. “Damages” can be material or financial. A damage deposit can be used to offset physical damages to the property, or financial damages via unpaid rent or fees. A security deposit is no different.

      However, there is a difference in a “holding deposit” compared to a security deposit – but that’s a different situation.

      It’s worth noting that I’m not a lawyer, and I don’t actually know if there is a “legal” difference, but all the legal websites that I’ve read treat them as the same thing. The only site that I could find with difference was here: http://www.tenantsunion.org/en/rights/faq/deposits#whats-the-difference-between-a-security-deposit-and-a-damage-deposit, and as you can see, it’s a very blurry line. In my non-legal opinion, most courts would consider them to be the same – especially if the lease says the deposit can be used for either.

  • L

    Hi Lucas, what happens if the old property manager won’t transfer our tenant’s damage deposit to the new property manager ( recently we switched new property management firm, we have a very difficult time to ask the old one to transfer our tenant’s damage deposit to the new one) ? Thanks for your help.

    • Lucas Hall

      Hi L,

      The deposit still belongs to the tenant no matter who the manager is. If the manager won’t transfer the money to the new manager, then you could report that manager to his/her licensing authority or local real estate board. They might launch an investigation and possibly suspend their license.

      If the manager doesn’t have a license, then keeping the money is the same as stealing, and you should treat it as such.

      Chances are good that if you threaten to notify the real estate board, or a small claims lawsuit, the manager will turn over the money immediately. Good luck. Please know that I’m not a lawyer, nor is this legal advice.

      • L

        Hi Lucas,

        Thanks for your reply and tips. We did mention about report them to the the real estate board but seems like we still having difficult time to move forward.

        1)What right does the landlord have in Nevada if our old property manager does not give us our final accounting statement within 30 days which stated on the agreement?

        2) Back to the damage deposit, the fund is belong to the tenants, so can our new property manager ask the tenants to sign a release form to transfer the damage deposit to her firm from the old firm ?

        3) Is there a time frame to transfer tenant ‘s damage deposit. if there is, if the old property manager fails to do so, what will be the penalty or what can we do?

        Thanks a lot for your help.

        Sincerely,

        • Lucas Hall

          Hi L

          1. This type of situation won’t be discussed in the landlord-tenant statutes. It’s just good business to give a final statement. The laws don’t cover everything.

          2. The tenant’s don’t need to sign anything. The money just needs to get transferred from one PM to another. At a minimum, the old PM could give the money to you (the owner) and then you could give it to the new PM.

          3. Perhaps, but you’d have to check with the real estate board.

          I don’t know what the penalties would be – you’d have to check with the real estate board or licensing authority in your state/county.

  • Lori W

    Hi. My question is does our security deposit have to be in my possession within 30 days or does my previous landlord have 30 days to mail it out. Its been over 30 days and I still haven’t received anything even though he claims to have mailed it almost 2 weeks ago. Just want to know if he had 30 days to put it in a mailbox or if he had to ensure it would be in my hand within that time. Thanks so much

    • Lucas Hall

      Hi Lori,

      Most statutes that I’ve seen don’t go into that much detail. Even if the requirement is to be “received” within 30 days, and the landlord fails, but does postmark it by the 30 day mark, I doubt a judge will care.

      Did you check your state laws, do figure out if it is indeed 30 days, and not 45 or 60? https://landlordology.com/state-laws

  • Dillon Loomis

    Hey Lucas, great article.

    Question. Why do you use an individual checking account for EACH property, rather than one checking account for the security deposits of ALL rentals, and then track on Excel or Quickbooks?

  • Darien DaCosta

    Thanks for the information; it has been helpful. When you setup the escrow account for the deposit, what should the account name be? Also, in FL, does it have to be a bank based in FL, or just with branches in FL?

    Thanks!

    • Lucas Hall

      Hi Darien,

      I’m not sure about the escrow laws in Florida. Perhaps a local settlement/title company would be able to clarify for you.

      I do suggest that you use a back with offices in Florida – but I’m not sure if you have to.

  • Bettina Lum

    I own rental property in MA & required 1st, last & security before possession of the premises was taken. Although a lease was left on the counter, neither the tenant or I ever signed it. I was nice enough to allow her to move & told her she can give me the security over 2 mths. She withheld this until certain demands were met. She finally gave me 1K of the $1600 that she owned me. I was waiting for the additional $600 before depositing it in a separate account. She has not been on time with her rent during the 3 mths she has been there. She is now demanding proof that her money was placed in an interest bearing account. I have signed with a realtor to finally rid myself of this headache & she is not cooperating.

  • Bridget

    Nothing available for the District of Columbia? It’s like my city doesn’t even exist on your map…

  • Nicole A.

    In CT they require an escrow account for the security deposit–is this to be distinguished from a regular checking account or can it be either?

  • Paula

    Hello I’m at my name is Paula and I am I just recently received my section 8 voucher I’m I’m also going and I’m also going through a domestic violence situation right now I have two little boys that and at home with me and I’m trying to I’m remove myself and my children from the residents that I’m at right now and to say for housing well I found a place that I was on that either I feel that the application is approved went into the office and filled out the paperwork that I needed to fill out for him section 8 some forward I am in Lou of the security deposit at that point in time and that manager or the at least the agent agreed to take a promise Siri note and that we would have that on security deposit there within 48 hours well the next Else for the apartments him she hasn’t tried I’ve emailed her to ask her to please don’t that we got it taken care of and she wasn’t willing to she doesn’t even return my email or anything like that am I feel like I don’t have the right to keep me and my kids safe and I feel like I’m less than human she made me feel horrible I’m is in a promissory note a legally binding document

  • Bobbie Jaeger

    In NC, can the landlord use the security deposit to make current repairs? These repairs would be damages that are more than “wear & tear”- large holes to the sheet rock.

  • Cheryl Alberino

    Hi. I’m hoping you can help answer an issue. I’ve taken over the accounting for a strip mall and one of the tenants that has been there for 5 years is leaving. We need to give back their security deposit, however, the original accountant did not record the security deposit on the balance sheet as a LT liability. Now that we are returning their deposit, I need to credit cash. Normally, my debit would be the LT liability account set up for that particular tenant. Since it was never set up, what is my debit? Thank you!

  • Damien Ungar

    Good day! I just want to give a huge thumbs up for the good info you might have right here on this post. I will be coming back to your weblog for more soon.

  • Niki

    Hi,
    I got security deposit from a tenant, she gave me the deposit to hold my place untill she have the money ready for the 1st month rent and sign the lease. First she told me only her and her kids will be leaving there, but then she said her boyfriend wanted to move in too and he has no income. I wanted to return the deposit to her and not rent it out to her as well since her credit report had a lot of collection and she is never paying any of them, and base on the last conversation she is lying a lot of things from me. What should I do to handle this situation when I received the deposit and found out she is not a good tenant after that.

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