Security Deposits in Delaware

Delaware landlords have a duty to comply with established legal procedures and laws that govern security deposit in the state. Both landlords and tenants should have some degree of knowledge on the subject of security deposit in their state.

Purpose of a Security Deposit

25 Del. C.§ 5514(c) maintains that the purpose of a security deposit is:

• To reimburse the landlord for specific damages that is more than normal wear and tear caused to the rental property by the tenant, or which cannot be fixed by painting and ordinary cleaning
• To pay the landlord for all rental owed by the tenant, including late charges and rent owed for early termination or abandonment of the rental agreement
• To reimburse the landlord for all reasonable expenses, which cannot be more than 1 month’s rent, in this case, related to renovation and rerenting of the property because of early termination of the lease agreement by the tenants

Allowable Security Deposit Charge in Delaware

In the instance where the rental agreement is for the duration of a year or more, a landlord cannot charge a security deposit that is more than 1 month’s rent. Landlords may charge a security deposit that is more than one month’s rent for primary residential tenancies if the rental agreement isn’t for a defined term, or if it’s on a month-to-month basis, where the tenancy is for a year. However, if the tenancy has lasted a year, the landlord must return any security deposit amount in excess of 1 month’s rent to the tenant. This includes the amount of any surety bond that is more than one month’s rent. None of the mentioned limits apply to furnished rental units as specified in 25 Del. C.§ 5514(a).

25 Del. C.§ 5514(i) establishes that pet deposits cannot be more than one month’s rent regardless of the duration of the tenancy. However, if the pet is a certified and trained support animal for a disabled person who is a resident of the rental property, a landlord cannot charge a security deposit.

Security Deposit Rules & Regulations for Landlords in Delaware

• Increasing the Deposit: Delaware landlords can increase the security deposit if the rental agreement allows such increases. If the increase of the security deposit is more than ten percent(10%) of the monthly rent, payment is required to be prorated over the term of the rental agreement, except for month-to-month tenancies. In that instance, the payment should be prorated over the course of four months. See 25 Del. C.§ 5514(j).
• Storing Security Deposit: Landlords are required to place security deposits in an escrow bank account in a federally-insured banking institution in the state. The landlord must disclose the location of the security deposit account to a tenant after a written request is made and has 20 days from the time the written request was made to disclose to the tenant the location of the security deposit account. Landlords are not permitted to use the account for any other business.
• Applying Security Deposit as Last Month’s Rent : A security deposit is not meant to be applied to the last month’s rent. A written agreement is needed between a tenant and landlord to establish a security deposit as last month’s rent.
• How to Get a Full Refund: A Delaware tenant can get their full security deposit back, if after vacating the property the landlord finds that:
  • Tenant has complied with all the terms of the lease
  • Tenant has no delinquent rent
  • Tenant has caused no damage beyond normal wear and tear
  If applicable, a full security deposit must be returned if the landlord doesn’t provide an itemized list of damages and each charge is not given to the tenant within 20 days of a tenant’s lease termination.
• Allowable Deductions: A Delaware landlord may deduct from the security deposit the following:
  • Unpaid rent owed
  • Payment for damages to the rental unit
  • Renovation and re-entry expenses
  • Cost of pet damage
• 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 Delaware

As specified by 25 Del. C.§ 5514(e), a landlord must return a security deposit to a tenant within 20 days of the expiration or termination of the rental agreement, if all or a portion of the deposit will not be withheld.

• Time Frame: Within 20 days of termination or expiration of the rental agreement, the landlord must provide the tenant with an itemized list of damages to the premises, as well as the estimated costs of repair for each and tender payment to be deducted from the security deposit in escrow. If the landlord doesn’t provide the requirement, it is an acknowledgement that no payment for damages is owed by the tenant.Additionally, a tenant has 10 days from the time of receipt of the tender of payment to object in writing to the amount withheld by the landlord.
• Forwarding Address Required: The return of the security deposit should be sent to the tenant at the address specified in the rental agreement or to a forwarding address, if provided in writing by the tenant at the time of or before the termination of the rental agreement. If the tenant fails to provide an address, the landlord is not responsible to give notice or required to provide double the amount of the original security deposit. However, the landlord will remain liable for any unused portion of the security deposit if the tenant makes a claim in writing to the landlord within 1 year from the termination or expiration of the rental agreement.
• Failure to Return Security Deposit as Required: 25 Del. C.§ 5514(g) establishes that if a landlord doesn’t return the full security deposit or the remaining portion after deductions within 20 days from the expiration or termination of the rental agreement the landlord will pay twice the amount of the original deposit. If a landlord fails to provide the location of the security deposit account within 20 days of  written request by a tenant, the landlord forfeits the right to hold the security deposit and has to return it to the tenant within 20 days. Furthermore, if the security deposit is not held in a federally-insured financial institution located in Delaware, the landlord cannot hold the deposit.

“Normal Wear and Tear” vs. Damage in Delaware

• “Normal wear and tear” is deterioration that occurs from the intended use of the rental property and without negligence, carelessness, accident, misuse, or abuse of the premises or contents by the tenant, household members, or guests on the premises. The extent of “normal wear and tear can” 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 Delaware

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 can be treated as either assets or liabilities when filing taxes. It is not automatically rental income when it is received by the landlord. Tenants shouldn’t deduct security deposits as expenses when filing and a landlord shouldn’t declare them as income when in escrow with the intention of returning it to the tenant. A security deposit becomes income when it is used for repairs and other expenses.
• 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 retains part or all of the security deposit for unpaid rent, then that portion should be included as income for that year when filing taxes. Forfeited deposits should be declared as income as well. A security deposit is taxable income only if and when a landlord has no obligation to return it to the tenant.

The Law on Security Deposits in Delaware

The state’s security deposit statutes can be found in Del. Code Ann. tit. 25, § § 5101 to 5907.

Tips for Delaware Landlords on the Right Practices for Security Deposits

• A security deposit charge cannot be more than one month’s rent if the rental agreement is for a year
• Return security deposits within 20 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 refund the tenant within the required timeframe
• Withhold security deposits for any property or pet damage, rent owed or expenses for renovations or reentry

Knowing Delaware security deposit statute can help both landlords and tenants protect themselves. Landlords can recover damages caused by tenants, while tenants can protect their rights as guaranteed by law. The laws can change so up-to-date on the statutes that govern security deposits.

Make sure to refer to Delaware Code Ann. tit. 25, §§ 5101-5907 for more on security deposits. Landlords should educate themselves on this topic to protect their rental property and avoid any legal trouble.