Having knowledge of Colorado’s security deposit laws can allow landlords and tenants to avoid certain conflicts. There are specific statutes that govern security deposits, which protect both landlords and tenants who are in a leasing agreement.
Quick Facts for Colorado
- Maximum Amount: No limits, except for mobile homes (cannot exceed 1 month’s rent)
- Duration for Return: Within 1 month of lease end
- Penalty for Failure to Return: Forfeiture of landlord’s right to withhold
- Penalty for Wrongful Deductions Made: Landlord pays 3x the amount wrongfully wittheld
- Deadline to Take Action on Tenant Deduction Dispute: Within 7 days of receipt of letter
Purpose of a Security Deposit
Security deposits serves as a safety net for landlords in the event that tenants do not adhere to their lease obligations and cause the landlord to experience some kind of loss. It ensures that landlords are compensated, in full or in part, for any loss incurred from any damage caused by the tenant to the rental property. It may also provide compensation for rent owed if a tenant vacates the rental property without first providing payment. C.R.S. §38-12-102 (2) maintains that the primary function of a security deposit in Colorado is to secure the performance of a rental agreement for residential premises. Commercial security deposits are not governed by any statutory regulation.
Allowable Security Deposit Charge in Colorado
Colorado doesn’t have an established maximum limit on security deposits for most rental properties. However, the exception is mobile home parks, where the limit on security deposits is one month’s rent or two month’s rent for multiple units. The amount charged for the security deposit should be written into the lease. Colorado tenants cannot charge a nonrefundable security deposit.
Security Deposit Rules & Regulations in Colorado
- Interest Payments: Colorado has no laws requiring landlords to place security deposits in an account to generate interest.
- Applying Security Deposit as Last Month’s Rent in Colorado: A security deposit is not meant to be 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. Your landlord could create a lease that establishes last month’s rent to be used as a secondary security deposit.
- How to Get a Full Refund: A Colorado tenant can get their full security deposit back if after vacating the property the landlord finds that:
- Tenant has fulfilled all the terms of the lease
- Tenant has paid the rent in full and on time every month,
- Tenant has left no financial obligation for the landlord to cover
- Tenant has caused no damage beyond normal wear and tear
- New Property Owner’s Responsibility: 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. The tenant should be notified by mail of such transfer and of the new owner’s name and address, or have the security deposit returned, or any remainder after lawful deductions by the landlord. See CRS §§ 38-12-103 3 (a) (b).
Returning Security Deposits in Colorado
- Timeframe: After the termination of the lease and acceptance of the premises after a walk-through, the landlord must return the security deposit within a month. Unless the lease agreement specifies a longer period of time, the security deposit should be returned before sixty days. See C.R.S. §38-12-103(1).
- Hazardous Condition: As established in See C.R.S. §38-12-104 (3), if there is a hazardous condition at the property, such as one involving gas, the landlord is allowed 72 hours to fix the problem after receiving a written notice regarding the gas hazard. The tenant can voluntarily leave if the hazard is not fixed, making the lease agreement null and void, in which case, the landlord has 72 hours from the time the tenant vacates the property to return the security deposit, all or in part.
- Written Statement: If the landlord is withholding any portion of a tenant’s security deposit, the landlord is required to provide the tenant with a written itemized statement with the exact reason for the for deduction along with the amount deducted, along with the portion of the security deposit that is being returned, if any.
- Delivery: The landlord must return the portion of the security deposit owed, as well as the itemized written statement to the tenant by mail to the last known address of the tenant.
- Failure to Return a Security Deposit in Colorado: Per C.R.S. §38-12-103(2), if a Colorado landlord fails to either return the entire security deposit or provide an itemized list of deductions from the security deposit, along with any remaining portion of the security deposit, within the required timeframe, the landlord forfeits all rights to withhold the security deposit.
The tenant can disagree with a landlord’s charges when the list of deductions is received and respond with a “Seven-day Demand Letter” to the landlord, itemizing the charges that he/she disagrees with and notify in that he/she may pursue legal action if the disputed portion of the security deposit is not returned within seven days of receipt of the letter. The landlord has to pay three times the amount of the portion of the security deposit wrongfully withheld, along with reasonable attorneys’ fees and court costs.
Allowable Deductions from a Security Deposit in Colorado
A Colorado landlord may deduct from the security deposit the following:
- Unpaid rent owed
- Unpaid utility bills
- Cost of abandonment of the premises
- Payment for damages to the rental property
- Any other breach of the lease causing financial loss to the landlord
“Normal Wear and Tear” vs. “Damage” in Colorado
- C.R.S. §38-12-102(1) defines “normal wear and tear” as deterioration that occurs from the intended use of the rental unit and without negligence, carelessness, accident, misuse, or abuse of the premises or contents by the tenant, members of the household of the tenant, or the invitees or guests of the tenant. “Normal wear and tear” include minor issues, such as gently worn carpets, loose door handles, fading wall paint and flooring, stained bath fixtures, lightly scratched glass, and dirty grout that occur naturally as a result of the tenant using the property as it’s designed to be used.
- “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.
Security Deposits and Tax Filing in Colorado
How security deposits are treated for tax purposes depends on whether or not a landlord retains or provide the tenant with a refund when the lease is terminated.
- 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 with the intention of returning it to the tenant. Security deposits are not income until they become as such.
- 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.
Colorado Law on Security Deposits
Colorado’s security deposit law is Colorado Revised Statutes(CRS) §§ 38-12-101 to 38-12-104.
Tips for Colorado Landlords on the Right Practices for Security Deposits
- Charge a reasonable security deposit that can cover potential losses that a tenant could cause.
- Return security deposits within 30 days of lease termination with an itemized written statement of any deductions.
- Know that you’ll pay three times the amount of the original security deposit if you fail to return the security deposit within the required timeframe.
- Withhold security deposits for any financial loss, damage, or other expenses that are a tenant’s liability.
- Seek damages in legal proceedings if the security damage where necessary
Knowing Colorado security deposit laws can help both landlords and tenants protect themselves. Landlords can protect their assets, and tenants can protect their rights and avoid being taken advantage of by a landlord. The laws can change so up-to-date on the statutes that govern security deposits.