Security deposits, and how they’re handled, may be one of the most misunderstood topics for landlords and property managers alike. Part of the confusion stems from the fact that laws regarding security deposits are different in each state. For example, many states have limits on how much the landlord can hold, but the amount can vary by state. Another example: some states require landlords to pay interest on security deposits while others do not. That’s why it’s important to learn the rules in your state. Mishandle a security deposit and you could lose your right to keep any of the security deposit no matter how much damage the tenant has caused. Worse yet, you could find yourself on the wrong side of a judge’s verdict, owing the tenant double or triple the amount of the deposit.

What follows is a general discussion about handling security deposits. At the risk of sounding like a broken record, be sure to check the laws in your state.

Deposit Amount

Several states, like Massachusetts, impose limits on the amount of security deposit that landlords can hold, while others, like Florida, do not. When a limit is imposed, it’s generally equal to a certain number of months of rent. For example, landlords in California can collect two months’ rent.

Bank Account

Where you hold the security deposit can also be a matter of law. In some states you are required to hold security deposits in a separate bank account for the benefit of the tenant. You may even be required to pay interest, depending on your state. In Massachusetts, for example, you are required to pay 5 percent per year or the amount of interest earned, whichever is less.

Statement of Condition

Whether your state requires one or not, it’s a good idea to give the tenant a written statement about the condition of the property. Both you and the tenant should sign the statement. Better still, do a walk-through with your tenant before he moves in, noting any pre-existing damage along the way. That way there will be no question about whether the hole in the wall was there before the tenant moved in.

Deductions for Damage

When the tenant moves out, you have the right to deduct money from the security deposit for any damage caused by the tenant. Do a final walk-through of the property with the tenant note any new damage. You can’t deduct for “normal wear and tear”, so be sure to exclude that. It’s a good idea to bring the digital camera so you can justify any deductions in case there’s a dispute. Depending on where you live, you may be able to deduct for unpaid rent as well. Again, check the laws in your state to be sure.

Refunds

Whether you deduct for damage or not, many states have rules regarding how long you have to refund the security deposit after the tenant moves out. For example, in Massachusetts, landlords must refund security deposits or provide tenants with a detailed list of damages and the cost of repairs within 30 days. If they don’t, they lose their right to deduct anything, no matter how much damage the tenant caused.

Security deposits are a valuable tool that can help protect landlords against damage caused by tenants, but they come with a certain level of responsibility. Handling them correctly will keep things running smoothly and keep you on the right side of the law.