Careers Business Ownership What Is a Security Deposit? Definition and Examples of Security Deposits Share PINTEREST Email Print VOISIN / Getty Images Business Ownership Industries Landlords Retail Small Business Restauranting Real Estate Nonprofit Organizations Import/Export Business Freelancing & Consulting Franchises Food & Beverage Event Planning eBay E-commerce Construction Operations & Success Becoming an Owner Table of Contents Expand What Is a Security Deposit? How a Security Deposit Works Requirements for Security Deposits Security Deposit Disputes By Erin Eberlin Erin Eberlin Erin Eberlin is a real estate and landlord expert, covering rental management, tenant acquisition, and property investment. She has more than 16 years of experience in real estate. Learn about our Editorial Process Updated on 09/17/20 A security deposit is a sum of money that a tenant agrees to place with a landlord before taking possession of a rental unit. The amount is usually based on the monthly rent, and it's intended to protect the landlord in the event of damage to the unit or a breach of the lease by the tenant. A security deposit is sometimes called a "damage deposit" because it protects the landlord against such issues. Many landlords require the equivalent of one and a half months' rent, but this can depend on state and local law. What Is a Security Deposit? A security deposit protects the landlord from financial loss should the tenant cause serious damage to the property or stop paying rent, forcing a time-consuming and sometimes expensive eviction process. The deposit is usually refundable, but some states, such as Nevada, dedicate a portion of the money to cleaning the unit after the tenant moves out. This money isn't refundable under that state's law. Although one and a half months' rent is a rather standard amount, this can also depend on state law. Pennsylvania allows landlords to require two months' rent during the first year of the lease, but this decreases to one month if the tenant remains in residence for longer than a year. The landlord must return the excess to the tenant at this time. Alternate name: Damage deposit How a Security Deposit Works Landlords aren't legally required to collect security deposits from their tenants, but it's in their best interests to do so. A tenant is more likely to avoid damaging the property and will want to follow the terms of their lease if they know their actions determine whether they receive their full security deposit back. A landlord can take deductions from the deposit in the event of damages rather than file a lawsuit against the tenant to pay for repairs. Some states, including Massachusetts, require that the money be deposited in a separate, dedicated bank account. A landlord can't hold the money in their business or personal account. It's nonetheless available to the landlord when and if the money is needed. Requirements for Security Deposits There's no uniform code for security deposits that covers the entire U.S. Each state also has unique rules for how soon a landlord must return or account for a tenant's security deposit after the tenant moves out. Each state allows a landlord to take deductions from a tenant's security deposit, but permissible reasons for doing so can vary. The landlord should return the security deposit in full at the end of a tenant’s lease if the tenant has fully followed the lease agreement and has caused no damage to the property. Otherwise, a landlord might be permitted to keep some or all of the deposit to cover any losses. Landlords cannot keep more of a deposit than the total cost of damages or missed rent payments. Landlords are required in most states to provide an itemized list of repairs that were necessary, as well as corresponding receipts for the cost, to the tenant. A landlord could potentially be sued if they don't or can't support deductions made from a security deposit. They could end up losing not only the security deposit and compensation for damages, but court and attorney fees as well. Landlords typically can't make deductions for repair issues that arise from normal wear and tear, although the definition of "normal" can vary a bit from state to state. These issues typically include: Faded wallpaper or paintRug and carpet wear, particularly after a lengthy leasePicture hooks and corresponding holes in the walls where prints or pictures were hungMinor dents in the walls from doorknobsFaulty appliances if they haven't broken down from misuse or abuse It's important that a landlord include the terms of the security deposit in the lease agreement. Explain the amount of the security deposit, where the money will be deposited, the reasons you might make deductions from the deposit, and when and how the deposit will be returned to the tenant. Many states require that a landlord must provide the tenant with a receipt after collecting a security deposit. This, too, should include the amount of the deposit, the name and address of the financial institution where the deposit will be held, and the annual interest rate the money will earn. Any interest earned on the security deposit rightfully belongs to the tenant, not to the landlord, and most landlords will turn the extra money over to the tenant at year's end or adjust one month's rent to account for it. Security Deposit Disputes Disputes must often be taken to small claims court when a landlord and tenant disagree about deductions that have been taken from a security deposit. The best way for a landlord to win this type of dispute is to understand the security deposit laws in their state and to follow and document any actions taken relating to the deposit. Key Takeaways A security deposit is an amount of money placed with a landlord to protect against losing money on a lease due to damage to the property or unpaid rent.State laws vary, but many states allow deposits equal to one and a half months’ rent.Landlords are required to deposit the money in a separate, dedicated bank account in many states.Deductions can be made from the deposit at the time the tenant moves out to repair any damage caused by the tenant, but not for normal wear and tear.