Security deposits are a form of insurance that most landlords require from tenants, as it protects them from bad tenant behavior and prevents rental income loss. Like other business-related aspects, there are some local and state rules and regulations for the landlord to follow to avoid running into legal issues.
Security Deposit Rules & Regulations to Consider
Collecting and Storing Security Deposits
Collecting security deposits is a common inclusion in a rental agreement, mostly to pay for normal wear and tear or unpaid rent. The average security deposit amount in most states is equivalent to one month's rent, but certain areas like California have specific laws.
As for storing the deposit, there are no specific requirements in San Jose, California. You can safely store the tenant's security deposit in an interest-bearing account, an escrow account, or a savings bank account.
Maximum Amount for Security Deposits
A recent change in California security deposit law states that property owners are only allowed to collect a maximum security deposit amount of one month's rent for a rental unit, whether it is furnished or unfurnished.
If you own no more than two residential rental properties that collectively have no more than four dwelling units, however, the maximum security deposit amount can't exceed two months' worth of rent, whether it's furnished or not.
What Can a Landlord Deduct from the Deposit
Other than the normal wear and tear, there are several damages that a landlord can deduct from the security deposit as long as it pays for damages in the rental property. You can take out amounts from the security deposit to:
- Compensate for monthly rent when the tenant fails to pay including late fees
- Cover normal wear and tear
- Replace broken windows
- Replace the carpet the tenant left holes or tears on
- Repair extensive damage on the wall from decorations
- Replace or repair damaged appliances
- Repair damages caused by pets
Depending on your lease agreement, the damages you can charge for can go beyond the mentioned instances. Furthermore, you will need to provide a written notice about making the deductions, along with an itemized statement.
Interest on Deposits
While some cities in California don't require the landlord to pay interest on security deposits, it is required for a rental unit in San Jose. They are only implemented in rent-controlled cities like Berkley, Santa Monica, and San Francisco, and that includes San Jose.
The security deposit can be placed in a standard checking account, and should only be withdrawn when the tenant moves out or the landlord needs to use it for normal wear and tear, unpaid rent, or other property damages covered in the rental agreement.
Returning Security Deposits
Landlords are required to return the security deposit after the tenant moves out of the dwelling unit. It must be sent to the tenant's forwarding address within 21 days and must include an itemized statement of deductions, including invoices or receipts.
You may also provide a comprehensive description of the work done, the time taken, and the hourly rate of the charges on the itemized list. This can help you skip the process of explaining the costs if the former tenant questions them.
Selling the Rental Unit
When you decide to sell your rental property in the middle of a lease term, the responsibility of enforcing the rental agreements along with the security deposit will be transferred to the new owner.
If you have made deductions to the security deposits, you need to make sure that the new landlord received the necessary documentation for it as well, since the landlord must be able to explain why they can't return the full security deposit.
Why Landlords Need to Learn Security Deposit Rules and Regulations
A landlord must pay attention to the basic information and rules under security deposits that can affect their business, especially if it can be disastrous if they break the rules. If you're unfamiliar with protocols and procedures, it would be best to consult an attorney or a company with expertise like Provident Property Management.
You Might Overcharge or Undercharge
Since tenants pay a security deposit to cover potential damages within the duration of their residential leases, you have to ensure that the amount is enough for repair costs or pay rent when they fail to. Once you use up the entire security deposit, you might face difficulties in charging them again.
Overcharging for the security deposit, on the other hand, can lead to tenants pursuing legal action. As per California Courts, a tenant can sue for up to $12,000 in small claims court, which is for the amount of the security deposit, two times the amount of the security deposit in damages, or both.
Forgetting Documentation
Something as simple as forgetting to provide documentation like a written notice or a written statement can be grounds for legal action. Even if deductions are made for unpaid rent or for replacing furniture, it's better to provide documentation, which come in the form of:
- An itemized statement
- Bank statements
- Receipts
While keeping up with all the paperwork and other money records can get overwhelming, you have the option to hire a property management company based in San Jose like Provident Property Management. We offer detailed financial statements you can review through our in-house owner portal.
Unauthorized Security Deposit Deductions
Even if the landlord holds the renter responsible for certain damages and the tenant agrees to let them deduct the costs from the deposit— laws, rules or regulations might not. You might end up paying more in legal fees for violating rules you didn't know about.
Hiring a Property Manager to Avoid Mistakes
Aside from knowing the necessary laws and lease provisions to follow regarding a tenant's deposit, companies like Provident Property Management can offer much more. You can profit from your property investments without the workload that comes with being a landlord.
You can use our free Rental Analysis Tool to determine how your business is doing or consult us about how you can maximize the value of your property. From tenant screening to eviction proceedings, our company offers services that can handle the basic responsibilities a rental property requires.
