- Standard Limit / Maximum Amount: No Limit (read more)
- What Can Be Deducted: Unpaid rent, early termination penalty, unpaid utilities, unpaid sewage charges, and cost of damage to the unit (read more)
- Time Limit for Return: 45 days from termination of the lease (read more)
- Penalty if Not Returned on Time: Security deposit and attorney’s fees (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. There is currently no limit on the amount Indiana landlords can demand as security deposit from which unpaid rent, penalty for early termination, cost of damage incurred, and unpaid sewer charges or utilities may be deducted. It must be returned within 45 days of termination of the lease. Otherwise, the landlord may be made to pay back the deposit and attorney’s fees.
Maximum Security Deposit Charge in Indiana
On the state level, there is currently no limit on the amount Indiana landlords can charge a tenant as security deposit.
Allowable Deductions on Security Deposits in Indiana
The landlord can only use the security deposit when the lease or tenancy has ended or has been terminated. Also, the landlord can only use the security deposit to cover the following:
- The unpaid rent;
- Penalty for early termination;
- The cost of damage to the unit beyond wear and tear; and
- Unpaid sewer charges or utilities.
Can the deposit be used by the tenant as last month’s rent? Not usually, but it can be done if there is a written agreement between the parties to do so.
“Normal Wear and Tear” vs. Damage in Indiana
“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.
Check out our article on wear and tear vs. damage to get a better idea of the difference.
Returning Security Deposits in Indiana
Time Frame: The landlord must return the security deposit or what’s left of it within 45 days after the termination of the lease and the return of the unit to the landlord.
Itemized List: If the landlord is to make deductions from the security deposit, the same must be itemized in a list to be delivered to the tenant within the same 45 days. The list must indicate the estimated cost of repairs and the amount the landlord is charging the tenant. If the landlord fails to provide this list within the time allowed, the landlord forfeits the right to make deductions.
Forwarding Address: The deadline to return the security deposit will not apply to the landlord unless the tenant has provided a forwarding address to where the landlord may mail the return of the security deposit and/or the itemized list of deductions.
Failure to Return Security Deposit as Required: If the landlord refuses or fails to return the security deposit within the 45 days, the tenant stands to recover the security deposit and attorney’s fees.
Security Deposits and Tax Filing in Indiana
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 Indiana
Receipt Requirements: The landlord is not required to provide a receipt for the security deposit in Indiana.
New Property Owner’s Responsibility: If the rental property is sold while the lease subsists, the buyer inherits the previous owner’s obligation to refund the tenant’s security deposit when the lease ends. However, the old landlord will remain liable to the tenant for the security deposit for 1 year after the sale of the property unless:
- The new buyer acknowledges the liability for the security deposit and notifies the tenant of the same; and
- The old landlord transfers the security deposit to the new buyer upon the completion of the sale.
For additional questions about security deposits in Indiana, please refer to the official state legislation, Indiana Code 32-31-3.