- Standard Limit / Maximum Amount: 1.5 months’ rent (read more)
- What Can Be Deducted: Unpaid rent, charges under the lease, cost of damage to the unit & non-refundable fees/deposits (read more)
- Time Limit for Return: 14 business days (read more)
- Penalty if Not Returned in on Time: 2 times the amount withheld (read more)
- Tenant’s Deadline to Dispute Charges: 60 days (read more)
Purpose. Security deposits are like safety nets. They ensure compensation for any loss that the landlord might incur because of the tenant’s acts. It covers for incidents like damage to the property, termination of the lease without notice or non-payment of rent.
Legal Basics. Arizona landlords can charge up to one and a half months’ rent as security deposit from which unpaid rent, charges, non-refundable fees or deposits and damages incurred may be deducted. It must be returned within 14 business days from the end of the lease. Otherwise, the landlord may be made to pay a penalty of twice the amount withheld.
Maximum Security Deposit Charge
The limit on the amount of security deposit in Arizona is the equivalent of one and a half months’ rent unless it’s for mobile home spaces, in which case the limit is higher: two months’ rent. To clarify, the security deposit includes compulsory advance rent payments.
Allowable Deductions on Security Deposits in Arizona
The landlord may use the security deposit or deduct charges from it during the term of the lease if the same is allowed under the lease or another agreement with the tenant.
Upon the termination of the lease, the landlord can use the security deposit to cover:
- Unpaid rent;
- Charges specified in the lease agreement;
- Cost of damages caused by the tenant’s failure to comply with obligations related to maintaining the premises; and
- Non-Refundable fees or deposits, but only if the landlord has stated them as “non-refundable” in writing.
To clarify item number 3 above, the landlord is not always allowed to use the security deposit to cover repairs for damage caused by the tenant. Two things must be met before the landlord can do so:
- The damage must not be due to normal wear and tear (read more); and
- The cause of the damage must be the tenant’s failure to comply with obligations to maintain the premises (read more).
Can the deposit be used by the tenant as last month’s rent? Not usually, but it can be done if there is a written agreement between the parties to do so. In fact, landlords in Arizona can charge other items to the security deposit for as long as they are provided for in the lease agreement.
“Normal Wear and Tear” vs. Damage in Arizona
Damage to the property that’s beyond normal wear and tear will likely be chargeable to the security deposit. So, it’s important to know the difference between the two:
- “Normal wear and tear” only include deterioration of the property that happens when the property is used as it was meant to be used and only when that deterioration occurs without negligence, carelessness, accident, misuse, or abuse by the tenant or the people the tenant brings there. Normal wear and tear can take on the form of gently worn carpets, loose door handles, fading wall paint and flooring, stained bath fixtures, lightly scratched glass, dirty grout and mold that occur naturally.
- “Damage” refers to the destruction that occurs because of abuse or negligence by a tenant during the course of the tenancy. It diminishes the usefulness, value or normal function of the rental unit. It can include pet damage, broken tiles, holes in the wall, broken windows and missing fixtures.
For a more in-depth discussion on the difference, check out our article on Normal wear and Tear vs Damage here.
The landlord can only charge the cost of repairs if the damage was caused by the tenant’s noncompliance with specific obligations to maintain the premises. Under this section the tenant must:
- Comply with all obligations on health and safety under applicable building codes;
- Keep the premises, including all plumbing fixtures, clean and safe;
- Dispose of garbage and other waste in a clean and safe manner;
- Use all facilities (e.g. electrical, plumbing, heating, etc.) and appliances reasonably; and
- Notify the landlord about the required repairs or maintenance promptly and in writing.
The rest of the tenant’s obligations under the same law consist of not doing some things, specifically those enumerated below. The tenant must not :
- Destroy, damage, or remove parts of the premises; or
- Disturb the neighbors’ peaceful enjoyment of the premises.
If the damage to the premises was caused by the tenant’s failure to comply with any of the above, then the landlord may take the cost of repairing it from the security deposit.
Returning Security Deposits in Arizona
Time Frame: Landlords are required to return the security deposit, or what’s left of it after deductions, within 14 days (excluding Saturdays, Sundays and legal holidays). Note, however, that the 14-day period only starts running when all of the three conditions below have happened:
- The lease has ended or been terminated;
- The tenant has given the premises back to the landlord (by returning the keys and/or vacating the premises); and
- The tenant has asked for the security deposit.
Manner of returning the deposit: Unless the landlord and tenant have agreed in a different manner, the landlord should return the security deposit by sending it with the itemized list of all deductions via first-class mail to the last known address of the tenant.
Deadline for disputing deductions: The tenant has 60 days after its mailing to dispute the deductions made on the security deposit, otherwise the tenant will be considered to have agreed to them and waived all other claims on it.
Failure to Return the Security Deposit as Required: If the landlord refuses or fails to return the security deposit within the 14-day period, the tenant may recover the amount that the landlord is withholding and an additional penalty that is equal to two times the amount withheld.
Security Deposits and Tax Filing in Arizona
How the security deposit will be treated tax-wise depends on whether or not the landlord gets to keep it (or part of it).
Taxable income: Security deposits are not automatically considered income when the landlord receives them. The IRS advises to not include security deposits as income if the landlord may still be required to return the same. They only become taxable income when the landlord no longer has any obligation to refund them. For example, if the security deposit was given in 2019 but was only forfeited in 2020, then the landlord should only include it as income in 2020.
Reporting security deposit as income: Whether or not security deposit should be reported as income and when to do so will depend on what it is being applied to or used as. Below are 3 simple rules the IRS has suggested to follow:
- If the deposit is forfeited due to a breach of the lease or applied to unpaid rent, then the amount kept should be declared as income in the year it was forfeited or applied.
- If the security deposit is used to cover expenses that are chargeable to it, then the landlord should only include the part of the deposit used as income if the landlord includes the cost of repairs as expenses. If the landlord doesn’t include them as expenses as a matter of practice, then there’s no need to include the part of the deposit kept to cover them as income.
- If there is an agreement between the parties to use the deposit or part of it as the final month’s rent, then the landlord should include it as income when the same is received.
Additional Rules & Regulations in Arizona
Receipt Requirements: The landlord is not required to provide a receipt for the security deposit in Arizona.
Security Deposit Interest in Arizona: Arizona laws do not require security deposits to be deposited into a separate account. Also, landlords are only required to pay interest on the security deposit when renting mobile home spaces. When required, the minimum interest on security deposits is 5% per year.
New Property Owner’s Responsibility: If the rental property is sold while the lease subsists, the buyer inherits the previous owner’s obligation to refund the tenant’s security deposit when the lease ends. Therefore, the buyer should make sure to procure the security deposit and the proper accounting for the same from the previous owner.