It’s smart business for landlords to demand a security deposit when leasing a rental unit. It serves Arkansas landlords and tenants alike to know and understand the laws that govern security deposit in their state. There are specific security deposit procedures that landlords should adhere to and they are also accountable for tenants’ deposits, which are intended to be refunded at the end of the tenancy. Tenants should know and understand their legal rights as it relates to security deposits when leasing a unit.
The Purpose of a Security Deposit
Security deposits can be considered a safety net for landlords in the event that tenants break the lease agreement resulting in a loss. It ensures that a landlord is compensated, in full or in part, for any loss incurred from any damage caused by the tenant to the rental property that is beyond ordinary wear and tear. It may also provide compensation for rent owed if a tenant vacates the rental unit without prior notice and payment.
Security Deposits that are Regulated in Arkansas
Arkansas’ security deposit laws are regulated in instances where landlords own either fully or partially, five or more rental units, or the rental property is managed by a third party other than the landlord, even if the number of rental units owned by the landlord is less than five. See AR Code § 18-16-303 (a) (b) for which security deposits regulated.
Allowable Security Deposit Charge in Arkansas
Arkansas landlords cannot charge a security deposit that is more than two months’ rent as established in AR Code § 18-16-304. However, if the landlord owns less than six properties, he/she does not have to comply with the two month maximum security deposit.
Security Deposit Interest in Arkansas
Arkansas has no laws applicable to security deposits being deposited into an escrow account or otherwise to generate interest.
Returning Security Deposit in Arkansas
In Arkansas, security deposit that is regulated is required to be returned to the tenant within 60 days following the termination of a tenancy as established by AR Code § 18-16-305 (a) (1). The deposit should be mailed via first class mail with the written notice and any payment to be deducted from the deposit for losses incurred by the landlord as a result of the tenant to the last known address of the tenant.
After 180 days, if the mailed letter containing the payment is returned to the landlord and if the landlord is unable to locate the tenant after reasonable effort, then the tenant forfeits the security deposit. The landlord can legally claim the security deposit. Tenants are responsible for providing landlords with a written statement of where they can be reached to ensure delivery of security deposit.
Failure to Return a Security Deposit in Arkansas
If an Arkansas landlord fails to return the security deposit within 60 days, according to AR Code § 18-16-306 (B) the tenant can get twice the amount of security deposit that was originally withheld by the landlord. Tenants can also get damages in the form of court costs and reasonable attorney fees incurred during the process of seeking a return of the security deposit.
Withholding Security Deposits in Arkansas
AR Code § 18-16-305 (2) maintain that landlords can withhold tenant’s security deposit, or a portion of the deposit rent owed and any damages that the landlord has suffered as a result of a breach of the lease agreement or tenant failing to comply with the lease agreement. In the instance that unpaid rent and damages is more than the amount of security deposit, the landlord can hold the entirety of the deposit. The landlord is required to provide the tenant with a written notice of the list of all deductions for repairs and the associated-cost, along with the remaining security deposit, if any 60 days after termination of the lease is terminated.
Allowable Deductions from a Security Deposit in Arkansas
An Arkansas landlord may deduct from the security deposit the following:
- Payment of all unpaid rent
- The amount to repair any damage caused to the rental property by the tenant
Applying Security Deposit as Last Month’s Rent in Arkansas
Typically, a security deposit is not automatically applied to the last month’s rent. A written agreement is needed between both parties to apply a security deposit as last month’s rent.
How to Get a Full Refund of Security Deposit in Arkansas
An Arkansas tenant can get their full security deposit back if after vacating the property the landlord finds that:
- No damage has occurred beyond that caused by normal wear and tear
- No rent is owed
Security Deposits and Tax Filing in Arkansas
What happens to the security deposits when the lease is terminated depends on whether it is refunded or the landlord withholds the refund.
- Accounting for Security Deposits: Security deposits are treated as either assets or liabilities for tax purposes. It is not automatically rental income when it is received. Tenants shouldn’t deduct security deposits as expenses when filing and landlords shouldn’t declare them as income when in escrow. Security deposits are not income until they become as such, after a portion, or all is withheld for losses by a landlord. It’s not income if it will be returned to the tenant.
- Security Deposit Write-off: Usually, landlords cannot deduct security deposits when filing taxes as expenses before they are used for one purpose or another. If a landlord withholds part or all of the security deposit for unpaid rent, then that amount should be included as income for that year when filing taxes. Forfeited deposits should be declared as income on a landlord’s tax return. A deposit is taxable income only if and when a landlord has no obligation to refund the tenant.
“Normal Wear and Tear” vs. Damage in Arkansas
- “Normal wear and tear” refer to minor deterioration that results from the intended use of the rental property and is not from negligence, carelessness, accident, misuse, or abuse of the premises by the tenant or any other household member or visiting guest. 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 destruction that occurs because of abuse or negligence by a tenant during the course of the tenancy and can affect usefulness, value, normal function of the rental unit. Pet damage (heavily stained and ripped carpet), broken tiles, hole in the wall, broken windows and missing fixtures are all examples of damage.
New Property Owner is Responsible for the Security Deposit in Arkansas
The new buyer inherits the liability of refunding the tenant’s security deposit that may be owed to the tenant when the tenancy ends. The buyer should make sure that the previous landlord transfers all tenant deposits and notifies the tenants of the sale of the rental unit.
Arkansas Law on Security Deposits
To learn more about Arkansas statutes on security deposits see A.C.A. §§ 18-16-301 et seq.
Tips for Arkansas Landlords on the Right Practices for Security Deposits
- Keep the charge for the security deposit within the cost of two month’s rent
- Return security deposits within 60 days of lease termination with an itemized written statement of any deductions
- Know that you’ll pay twice the amount of the original security deposit if you fail to return the security deposit within 60 days
- Withhold security deposits for rent owed and damages
- Seek damages in legal proceedings if the security damage doesn’t sufficiently cover losses
Knowing Arkansas security deposit laws can help both landlords and tenants to protect themselves. Landlords can protect their assets, while tenants can protect their rights and avoid being taken advantage of by a landlord. Keep in mind that the laws can change and so staying up-to-date on the statutes that govern security deposits is a personal responsibility.