- Standard Limit / Maximum Amount: 2 month’s rent (read more)
- What Can Be Deducted: Unpaid rend & cost of damage to the unit (read more)
- Time Limit for Return: 60 days after end of lease (read more)
- Penalty if Not Returned in on Time: Double the original deposit (read more)
- Tenant’s Deadline to Claim Funds: 180 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. The maximum security deposit Arkansas landlords can take is the cost of two-months’ rent, from which they can deduct unpaid rent and damages from tenant’s breach of their agreement. However, the limit doesn’t apply if the landlord has less than 6 units and isn’t leasing through a manager. The landlord must return it within 60 days. Otherwise, the landlord may be made to pay a penalty of double the deposit.
Maximum Security Deposit Charge in Arkansas
Arkansas landlords cannot charge security deposit that is more than two months’ rent . However, if the lease falls under the exception, the limit will not apply.
Exceptions to Security Deposit Rules
Under the Arkansas code, the limit and the rules relating to security deposit we will discuss below will not apply if the landlord satisfies these requirements:
- If the landlord owns less than 6 properties or units; and
- If the landlord does not have a manager handling the lease or lease-related activities like collecting rent
Both of the requirements above must be satisfied. Otherwise, the rules will apply.
Allowable Deductions on Security Deposit in Arkansas
An Arkansas landlord may deduct the following from the security deposit:
- Unpaid rent
- The cost of damages which the landlord has suffered because of the tenant’s noncompliance with the rental agreement
Can the deposit be used by the tenant as last month’s rent? Not usually, but it can be done if, and only if there is a written agreement is between the parties to do so.
“Normal Wear and Tear” vs. Damage in Arkansas
- “Normal wear and tear” refers to the 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. They are minor issues that occur naturally like aging and expected decline as a result of everyday living. These can include 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,” on the other hand, is deterioration or destruction that is the tenant’s fault, either through deliberate acts or as a result of negligence during the tenancy period. With respect to those chargeable to security deposits in Arkansas, it refers to the damage that resulted from non-compliance with any of the tenant’s obligations as such under the law. (read more on tenant’s obligations).
Check out our article on wear and tear vs. damage to get a better idea of the difference.
Returning Security Deposits in Arkansas
Time Frame: Landlords are required to return the security deposit, or what’s left of it after deductions, within 60 days following the termination of the tenancy. If he has made charges on it, he is also required to provide an itemized list of the same within the same 60 days.
The landlord can return the deposit and deliver the notice for deductions any reasonable way he can for as long as the tenant gets it. But if he there isn’t a more practical way, or if he prefers it, the landlord is considered to have fulfilled his obligation if he mails the deposit with the written notice of deductions via first-class mail to the last known address of the tenant.
Unclaimed Deposits: After 180 days from the date of mailing the letter containing the deposit and notice, if the letter is returned to the landlord and he is unable to locate the tenant after reasonable effort, then the security deposit is forfeited and becomes the landlord’s property. Tenants are responsible for providing landlords with details of where or how they can be reached to ensure the delivery of security deposit.
Failure to Return Security Deposit as Required: If the landlord refuses or fails to return the security deposit within the 60 days, the tenant stands to recover the following:
The security deposit, or what’s left of it after allowed deductions
- Damages equal to 2 times the amount the landlord must return
- Costs of the suit
- Reasonable attorney’s fees
That means, the landlord may possibly end up handing the tenant more than 3 times the security deposit: the original security deposit owed, plus double that, plus costs and attorney’s fees.
However, the landlord will be liable only for costs and the amount erroneously withheld if the security deposit was withheld:
- Because of an error that occurred even if he had procedures in place intended to avoid such errors; or
- Because he and the tenant have a genuine dispute or disagreement on the amount owed.
An example of an error under the first exception would be if the landlord thought the tenant did not pay the last month’s rent because the record of that payment went missing. The error should not have occurred due to the negligence of the landlord.
Security Deposits and Tax Filing in Arkansas
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 Arkansas
Receipt Requirements: The landlord is not required to provide a receipt for the security deposit in Arkansas.
Security Deposit Interest in Arkansas: Arkansas does not require security deposits to be deposited into an escrow account or any other account that generates interest. Neither is the landlord required to pay interest on the security deposit.
New Property Owner’s Responsibility: If the rental property is sold, the buyer inherits the liability of refunding the tenant’s security deposit when the tenancy ends. He should make sure that all the security deposits with the previous landlord are accounted for and are transferred to him because he will be responsible for returning them to the tenants when their respective tenancies end.
For additional questions about security deposits in Arkansas, please refer to the official state legislation, Arkansas Code § 18-16-301 to § 18-16-306, for more information.