Can Security Deposits Be Used for Rent?
Ideally, all of your tenants will pay their rent in full and on time. However, there are instances where tenants fall short of their obligations. When this happens, property owners may consider applying the tenant’s security deposit towards unpaid rent. While you may assume that the answer is yes, that’s not always the case. Refusing to return the security deposit in lieu of unpaid rent could actually land you in legal trouble if done incorrectly.
In this article, we’ll discuss everything you need to know about security deposits and unpaid rent including what security deposits can be used for, what they can’t be used for, and reasons why using a security deposit for unpaid rent may not be the best idea.
How do security deposits work?
The first thing to know about security deposits is that they are governed at the state level. Security deposit laws differ from one state to another and establish how security deposit limits as well as timelines during which they need to be returned to the tenant. Some cities, particularly those with rent control laws, may require property owners to pay interest on security deposits by placing security deposit funds in an interest-bearing account.
Whatever state laws apply to your rental property, make sure to clearly explain security deposit requirements your rental agreement with a new tenant. Tenants aren't always aware of state laws governing security deposits, especially if they just moved from another state.
The second thing to note about security deposits is why they’re collected. Property owners require security deposits to protect their property and their interests as an investor during the rental period. As long as the rental property is returned to the owner in the same condition in which it was given, the tenant will get their security deposit back.
Landlords usually request a security deposit along with the first month's rent. In most cases, the security deposit would cover excessive cleaning fees and property damage. However, in some cases, it might also cover unpaid rent.
It’s important to note that if cleaning services are minimal, no property damage is taking place, and the tenant is paying rent on time, the property owner is legally obliged to return the security deposit in full at the end of their stay. In most states, property owners need to return a security deposit within 20-30 days.
What can security deposits be used for?
If the property is left in an unreasonable condition the property owner may be entitled to keep all or some of the tenant’s security deposits in order to cover the costs of cleaning or repairing the property. However, there are limits on how a security deposit can be applied. Some of the most common scenarios in which property owners use security deposits include:
- unpaid or late rent
- excessive cleaning costs
- repairing damages beyond normal wear-and-tear
- early termination of the lease (if explicitly outlined in the lease that terminating the lease will cause the tenant to forfeit all or a portion of the security deposit)
What can security deposits not be used for?
There are a few ways in which property owners are not allowed to use security deposits. Most of these rules exist to protect renters from exploitative property owners, but they often protect property owners as well. In most places across the country security deposits cannot be used for:
- last month's rent (unless previously agreed upon in writing)
- normal wear-and-tear cleaning costs
- repairs due to normal wear-and-tear
- property costs not related to the tenant
When should a security deposit be used to pay for unpaid rent?
It may be in your best interest to apply a tenant’s security deposit towards unpaid rent when the only grievance you have with the tenant is one month of outstanding rent. Given that security deposit limits are often capped at one month’s rent, chances are you won’t be able to cover more than a month of rent with the tenant’s security deposit.
In cases where a tenant owes multiple months of rent, applying the tenant’s security deposit towards unpaid rent isn’t advised. Instead, it’s better for a property owner to use these funds to pay for legal fees associated with filing a claim in small claims court.
Unfortunately, when a tenant-landlord relationship goes south, the tenant may retaliate by intentionally causing property damage or failing to properly clean/vacate the premises. When this happens, the property owner would need to hire contractors to repair the damage caused to the property and/or hire a moving company to prepare the unit for the next tenant.
However, if you’ve verified that your tenant has left your property in good condition, cleaned up after themselves, and hasn’t cause any property damage, using their security deposit toward’s unpaid rent is OK as long as it is legal in the state in which your property is located.
Why shouldn’t a property owner use a security deposit to cover monthly rent?
Although security deposits can be used to compensate for unpaid rent, this doesn’t mean it’s always best. Sometimes tenants request that their security deposit be used to cover their last month's rent in order to skip a payment before moving out. Although a property owner may be willing to do this, using the security deposit for rent isn’t legal in all states. Even when it is legal, applying a tenant’s security deposit towards their last month of rent may be unwise for the property owner, the tenant, or both.
Applying a security deposit towards last month’s rent is particularly disadvantageous on month-to-month leases where the property owner may have raised the rent at some point during the tenancy. Chances are the security deposit won’t cover a full months rent if the security deposit you collected from the tenant was equal to first month’s rent.
A tenant may also prefer to use a security deposit to pay for last month’s rent if they’ve damaged the rental unit beyond what the security deposit would cover. When this happens, property owners may need to take their tenant to small claims court or simply absorb the losses incurred by property damage. In either case, you’ll want to have access to a security deposit.
The bottom line on using a security deposit to pay rent
Before using a tenant's security deposit to cover unpaid rent, property owners should carefully consider their options. While it may seem like a straightforward solution to address rental issues, the legality of using a security deposit for unpaid rent varies from state to state. The specific circumstances of the tenant-landlord relationship factors into this decision as well.
Security deposit money is designed to cover expenses related to damages beyond normal wear-and-tear, excessive cleaning costs, and early termination of leases, among other things. However, there are limitations as to how money paid towards security deposits can be utilized as well as rules in place to prevent misuse and ensure fair treatment of tenants.
When considering whether to apply a security deposit toward unpaid rent, property owners must be particularly mindful of state laws governing security deposits. While it might be permissible under certain conditions, property owners should exercise caution when faced with situations involving multiple months of unpaid rent or when the property is severely damaged.
Nonetheless, it's important to recognize that the use of security deposits for unpaid rent is not a universally recommended practice. Legal constraints, tenant-landlord relationships, condition of the property and the amount of rent that is owed all factor into where using a security deposit for rent is a good idea.