In Indiana, the collection and return of security deposits are primarily regulated under IN Code § 32-31-3-9. These laws provide a set of rules that Indiana landlords and property managers have to follow to protect all parties.
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; however, certain city and county laws may impose such limits.
Additional Pet Deposits: Under Indiana’s law, the landlord may ask for an additional pet deposit. However, people with disabilities who use service animals are entitled to full and equal access to housing. Thus, the tenant may not be discriminated against and the landlord may not require the tenant to pay extra to have a service animal. If the service animal causes damage to the rental unit, the tenant is liable to pay for any damages.
The Federal Fair Housing Act requires housing facilities to allow tenants who use service dogs and emotional support animals to have an equal opportunity to use and enjoy their home.
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.
- Damage or destruction of carbon monoxide alarms and/or smoke detectors.
- Cost of damage to the unit beyond wear and tear.
- Costs of re-renting the dwelling unit after a breach by the tenant (this includes any fees or commissions that were previously paid by the landlord to a real estate broker).
- Unpaid water or sewer charges and/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.
“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. The landlord shall mail the tenant an itemized list of damages, a check or money order in the amount of the security deposit or what’s left of it.
Itemized List: If the landlord makes deductions from the security deposit, the landlord must provide a written itemized list of deductions. The list should include the description of the damaged items, the cost of repairing/replacing the damaged items, and the amount which will be deducted from the security deposit. The landlord shall deliver the written itemized list to the tenant within 45 days.
Forwarding Address: The deadline to return the security deposit will not apply to the landlord unless the tenant has provided a forwarding address in writing.
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 full security deposit and attorney’s fees. The tenant may file a case with the Small Claims Court.
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 2020 but was only forfeited in 2021, then the landlord should only include it as income in 2021.
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 three 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 previous landlord will remain liable to the tenant for the security deposit for one year after the sale of the property unless:
- The new buyer acknowledges the liability for the security deposit and gives notice to the tenant of the same; and
- The previous 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.