California landlords and tenants alike should know about the laws that govern security deposit for their own benefit. There are particular security deposit procedures that landlords are required to adhere to and also be accountable for tenants’ deposits. Tenants should know and understand their legal rights when it comes to security deposit.
The Purpose of Security Deposits
According to California Code 1950.5 (b), security deposits are used to reimburse the landlord for costs related with processing a new tenant, or that is charged as an advance payment of rent, used or to be used for rent owed, repair of damages not caused by ordinary wear and tear, cleaning after termination of tenancy and cover the cost of future breaches of the lease agreement.
Allowable Charge for Security Deposits in California
California landlords cannot charge a security deposit that is more than two months’ rent, in the case of unfurnished residential property, and an amount that exceeds three months’ rent, in the case of furnished residential property. This does not cover the first month’s rent that is paid on or before initial occupancy
Returning Security Deposits in California
The landlord is required to deliver the security deposit by personal delivery or by first-class mail or postage prepaid, along with a copy of an itemized statement indicating the amounts deducted from the security deposit and the basis for the deductions to the address provided by the tenant. If the tenant does not provide an address, the security deposit should be mailed to the rental unit that has been vacated. However, the landlord and tenant may mutually agree to have any remaining portion of the security deposit delivered electronically to a bank account or other financial institution selected by the tenant.
The landlord and the tenant may further agree to provide a copy of the itemized statement of deductions and charges incurred to an email account provided by the tenant. If the security deposit is sent by personal delivery, the tenant is required to sign his/her name on the landlord’s copy of the notice to acknowledge acceptance of the receipt.
- Timeframe: California Code 1950.5 (g) (1) maintains that a California landlord has 21 calendar days after the tenant has moved out of the rental property to return the tenant’s security deposit in part or full. This could begin at the time that either the landlord or the tenant provides a notice to terminate the tenancy, or 60 calendar days prior to the expiration of a fixed-term lease
- Failure to Return a Security Deposit: If a landlord does not return the security deposit within 21 days, the landlord will have to pay twice the amount of the original security deposit. Tenants may also get addition compensation for actual damages that the court may award for bad faith whenever the facts warrant that award.
- Withholding a Security Deposit: According to California Code 1950.5 (3) (m), a lease agreement cannot contain a provision that establishes security deposits as “nonrefundable.” However, a landlord can withhold all or a portion of a tenant’s security deposit for losses and charges incurred. California Code 1950.5 (f) (3) maintains that a tenant has the opportunity after the initial inspection until termination of the tenancy to fix damages in order to avoid deductions from the security.
Allowable Deductions From a Security Deposit in California
A landlord can deduct from the tenant’s security deposit the following:
- Unpaid rent
- The cost of repairing damage to the rental property apartment in excess of normal wear and tear.
- Cleaning costs when tenants vacate the property
- Any future debts incurred that result from a tenant’s violation of the lease
- Other lease violations that amounts to a loss
Paying Interest on Security Deposits in California
While California law does not require landlords to pay interest on security deposits, under local laws, there are 15 rent-controlled cities that require landlords to pay interest on the security deposit, inclusive of the last month’s rent if the tenant has resided in the rental for at least one full year. Cities like Los Angeles and San Francisco specify the interest rate to be paid.
Interest payable to tenants is generally determined in two ways: 1) simple interest rate established by the Rent Adjustment Commission; or 2) the exact amount earned on the security deposit. Unpaid and accrued interest on a tenant’s security deposit is required to be paid at the end of the tenancy. If a landlord fails to pay a tenant the required interest, it is within the tenant’s right to bring an action in court against the landlord.
Applying Security Deposit as Last Month’s Rent in California
California law prohibits a tenant from using the security deposit as a replacement for paying the last month’s rent. If it is established in the lease that the tenant paid “first month’s rent,” “last month’s rent” and a security deposit, the tenant doesn’t have to provide last month’s rent a second time. However, if a landlord explicitly created an agreement to substitute the deposit for last month’s rent, then in that specific case, the security deposit can be used for the last month’s rent.
How to Get a Full Refund of Security Deposit in California
A tenant can get their full security deposit back if after vacating the property the landlord finds it to be in substantially the original condition it was rented, excluding normal wear and tear.
Security Deposits and Tax Filing in California
Depending on whether or not a landlord retains or refunds the security deposit will determine how it’s treated for tax purposes.
- Accounting for Security Deposits: Security deposits are treated as either assets or liabilities. It is not automatically rental income. Tenants shouldn’t deduct security deposit as expenses and landlords shouldn’t declare them as income until they become such. Security deposits are not income when in escrow to be refunded to the tenant, only if, and after, a portion, or all is withheld for losses.
- Security Deposit Write-off: Typically, landlords cannot deduct security deposits when filing taxes as expenses until they are used, all or in part. If a landlord withholds part or all of the security deposit because the tenant breaks the lease by vacating the property early without paying the rent, that amount can be included in your income in that year on your tax return. Forfeited deposits should be included on your tax return as income. 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 California
- “Normal wear and tear” refer to minor issues that occur naturally as a result of the tenant using the property as it’s designed to be used and aging. These minor issues can include gently worn carpets, loose door handles, fading wall paint and flooring, stained bath fixtures, lightly scratched glass and dirty grout and even mold.
- “Damage” refers to destruction that is a result of abuse or negligence by a tenant during the tenancy period. Damage to the rental property can negatively impact its usefulness, value, normal function. Damage can include pet damage (heavily stained and ripped carpet), broken tiles, hole in the wall, broken windows and missing fixtures.
New Property Owner is Responsible for the Security Deposit in California
In California, if a landlord sells the property, the buyer inherits the liability of refunding the tenant’s security deposit or prepaid rent to the tenant when the tenancy ends. The new owner is responsible for ensuring that all tenants’ security deposits are properly transferred to them. Tenants should be notified in writing of the name, address and phone number of the new owner. See California Code 1950.5 (h) (1) (2).
California Law on Security Deposits
California Security Deposit Law is California Code, Civil Code – CIV § 1950.5 and 1940.5. All the relevant statutes are found in this code.
Tips for California Landlords on the Right Practices for Security Deposits
- Ensure that your security deposit charge does not exceed two month’s rent
- Return security deposits within 21 days after lease termination
- Allow tenants the opportunity to fix damages after the initial inspection, but before the lease ends
- Know what losses and charges security deposit can be applied to
- Find out if your city requires paying interest on security deposits
Knowing the law that governs security deposits is helpful in allowing tenants to understand their rights and for landlords to maintain compliance and protect their interests.