Landlords should familiarize themselves with the statewide regulations that govern security deposits in Indiana and understand their responsibilities.
Quick Facts for Indiana
- Maximum Amount: No statutory limits
- Duration for Return: Within 45 days from tenant moveout
- Penalty for Late Returns: Original amount will be doubled
- Offering Motor Vehicle Lien as Security Deposit: Allowed
Purpose of a Security Deposit
IC 32-31-3-9 (a) defines security deposit an amount of money paid by a tenant to the landlord, intended to be held for all or a part of the term of the rental agreement to ensure that a tenant will adhere to his/her obligations established in the rental agreement.
The purpose of a security deposit is to serve as a safety net for landlords if they suffer financial losses that may be caused by damage to the rental property, unpaid rent or other breaches of the lease agreement. A security deposit ensures that landlords are compensated for losses.
Allowable Security Deposit Charge in Indiana
Indiana doesn’t have a statutory limit on security deposit charges at the state level. Landlords are free to charge an amount he or she sees fit.
Security Deposit Rules & Regulations for Landlords in Indiana
- Allowable Deductions From Security Deposit: Landlords are allowed to make deductions for the following (IC 32-31-3-13):
- Reimbursement for actual damage done to the rental unit that are not the result of ordinary wear and tear.
- All rent owed, including rent due for premature termination of the rental agreement and last month’s rent if there’s a written agreement between the landlord and the tenant.
- Utility Cost
- Sewer charges
- Other obligations established under the rental agreement that are unpaid by the tenant
- Applying Security Deposit as Last Month’s Rent: A security deposit is not intended for use by the tenant as last month’s rent. However, under Indiana law, if there is a written agreement between the landlord and tenant, the security deposit can be used to cover last month’s rent (IC 32-31-3-13 (3)).
- How to Get a Full Refund of Security Deposit: When a tenancy ends, a tenant can get his/her full security deposit if there is no damage to the rental property, all rent is paid in full, all charges in the rental agreement are covered and all rental obligations established in the lease are met by the tenant. If the landlord also fails to provide a written notice of the damages and the charge for each damaged item, a tenant should have the full security deposit returned.
- New Owner’s Responsibility: Under IC 32-31-3-19 (a) if the landlord sells the property that is under a rental agreement and the tenant receives a written notice of the sale, the landlord is no longer liable for the security deposit. However, 1 year after giving notice, the landlord remains liable to the tenant for the security deposit unless:
- the purchaser acknowledges that he/she is now responsible for the security deposit by giving notice to the tenant
- upon giving notice, the seller transfers the security deposit to the purchaser.
- Motor Vehicle Liens as Security: While a landlord may not require that a tenant provide a lien on a motor vehicle that he/she owns to be used as a security deposit or to cover the tenant’s rent, a landlord can accept a lien on a motor vehicle as security. The landlord must:
- File or record the lien under IC 32-33
- comply with the requirements concerning security deposits (IC 32-31-3-13.5)
Returning Security Deposits in Indiana
- Time Frame: Under IC 32-31-3-14, a landlord has 45 days after the tenant has moved out to return the security deposit and mail a tenant an itemized list of damages. The list should state the following:
- The estimated cost of repair for each damaged item
- A check or money order for the remaining amount of the security deposit after the deductions
- Failure to Return Security Deposit as Required: If an Indiana landlord failed to provide a written notice of damages, it is seen as an agreement that no damages are owed, and the landlord is required to immediately refund the full security deposit (IC 32-31-3-15). Failure to provide a written notice of damages and charges, returning the remainder of the security deposit or the full deposit as required in the established time period, a landlord will have to pay twice the amount of the original deposit charged, plus reasonable attorney’s fees and court costs (IC 32-31-3-16).
Security Deposits and Tax Filing in Indiana
A security deposit can either be held to cover losses suffered by the landlord or refunded to the tenant, all or in part. 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 when filing taxes. It is not automatically rental income when first received. Tenants shouldn’t deduct security deposits as expenses when filing their taxes and landlords shouldn’t declare them as income when in escrow intended to be returned to the tenant at the end of the tenancy. 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.
“Normal Wear and Tear” vs. Damage in Indiana
- “Normal wear and tear” is deterioration that occurs as a result of use for which the rental unit is intended and without negligence, carelessness, accident, or misuse or abuse of the premises or contents by the tenant or members of his household, or their invitees or guests.
It 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 to the rental unit 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.
The Law on Security Deposits in Indiana
Indiana’s security deposit law is found in IC 32-31-3.
Tips for Indiana Landlords on the Right Practices for Security Deposits
- Charge a reasonable amount for security deposits since there is no statutory limit established by law
- Return security deposits within 45 days after the tenant vacates the premises.
- Prepare to pay the tenant twice the amount of the original deposit if you fail to return the security deposit within the required time
- Provide a written notice of the damages and the charge of each damaged item to the tenant or lose the full deposit
- Accept but do not require that a tenant put a lien on their vehicle for security if you wish
- Withhold security deposits for any financial losses, damages or other expenses
- Seek damages in legal proceedings if the security deposit is insufficient to cover the losses caused by the tenant
Indiana security deposit law is available to both landlords and tenants. It is beneficial for both parties to familiarize themselves with the laws in order to protect their rights. A security deposit is an important part of the leasing process. Tenants have a responsibility to adhere to their lease obligations, while landlords must properly secure and handle the security deposit that is received from tenants until the tenancy period ends.
Make sure to refer to Indiana Code 32-31-3-9 (security deposit definition) and 32-31-3-12 (security deposit return) for more on security deposits. Landlords should educate themselves on this topic to protect their rental property and avoid any legal trouble.