Tenants and landlords in Iowa should know the security deposit law in the state and their legal rights when entering a rental agreement.
Quick Facts for Iowa
- Maximum Amount: Cannot exceed 2 months’ rent
- Duration for Return: Within 30 days after end of lease
- Penalty for Late Returns and Wrongful Deductions: Original amount will be doubled
- Deadline to Claim Funds: 1 year; after this, landlord gets to keep deposit
Purpose of a Security Deposit
The purpose of a security deposit is to serve as a safety net for landlords if they suffer financial losses that may have been caused by damages to the rental property, unpaid rent or other breaches of the lease agreement. A security deposit ensures that a landlord is compensated for losses and may also incentivizes tenants to adhere to their lease obligations in order to have their security deposit returned at the end of the lease term.
Allowable Security Deposit Charge in Iowa
Iowa landlords cannot charge a tenant a security deposit that is more than two month’s rent (IA Code 562A.12(1)).
Security Deposit Rules & Regulations for Landlords in Iowa
- Storing Security Deposit: Landlords are required to hold security deposits in a federally insured banking institution, including a bank, savings and loan association or credit union. Security deposits should be kept separate from the landlord’s personal funds. While not required, security deposits may be held in a trust account.
- Interest-Bearing Account: Security deposits may be held in an interest-bearing account. Any interest earned on a security deposit during the first five years of a tenancy is the landlord’s (IA Code 562A.12(2)).
- Allowable Deductions From Security Deposit: Iowa landlords are allowed to make the following deductions from the security deposit in an amount that is reasonably necessary (IA Code 562A.12 (3a)):
- Rent owed or of other monies due to the landlord that is established in the rental agreement.
- Repair and restoration of the rental property in excess of ordinary wear and tear
- Expenses that result from a landlord recovering possession of the rental property that a tenant has refused to surrender or vacate
- Applying Security Deposit as Last Month’s Rent: A security deposit is not intended to be used as the tenant’s last month’s rent. The security deposit is not rent money and wouldn’t simply be used to cover tenants’ last month’s rent if they vacate without paying. It’s meant to cover damages/losses.
- How to Get a Full Refund of Security Deposit: At the end of the tenancy, a full security deposit can be returned to the tenant if there is no damage to the rental property, rent is paid in full, and all charges in the rental agreement are covered.
- Rental Unit Change Ownership: When the landlord’s ownership of the rental property is terminated, the landlord or his/her agent must transfer the security deposit, or any amount remaining after deductions to the new owner within a reasonable time. The landlord should notify the tenant of the transfer, along with the new owner’s name and address, or return the security deposit to the tenant. If the landlord complies with these requirements, he/she is no longer liable for the security deposit. (IA Code 562A.12 (5a, 5b)).
- New Property Owner’s Responsibility: If the landlord doesn’t return the deposit to the tenant, the new owner is responsible for the security deposit, except if the tenant objects to the stated amount of the security deposit that is transferred within 21 days after getting the written notice. The new owner’s obligation is limited to returning the amount of deposit contained in the notice. The notice should contain a stamped envelope addressed to the new owner. (IA Code 562A.12 (6))
Returning Security Deposits in Iowa
Iowa landlords are required to return a tenant’s security deposit by mail to the address provided in writing by the tenant. Aside from the refund, they should also provide an itemized list of damages and the charges deducted from the security deposit.
- Timeframe: Iowa landlords have 30 days from the date the tenancy was terminated and receiving the tenant’s mailing address or delivery instructions to return the security deposit to the tenant. If the tenant is withholding the security deposit, all or in part, he/she must provide the tenant a written statement showing the exact reason for withholding. The statement should specify if the security deposit or a portion of it is withheld for the restoration of the rental property and the nature of the damages (IA Code 562A.12(3)).
- No valid mailing address: If the landlord is not provided with a mailing address for the tenant or instructions within one year from the termination of the tenancy, the tenant forfeits all right to the security deposit, which the landlord is allowed to keep (IA Code 562A.12(4)).
- Failure to Return the Security Deposit: If an Iowa landlord fails to provide an itemized list of damages and the charges for each damaged item within the 30-day period of the lease termination and receipt of the tenant’s mailing address or delivery instructions, the landlord loses his/her right to withhold any portion of the security deposit. Likewise, a landlord is required to pay the tenant twice the amount of the original security deposit if all or any portion of the security deposit is withheld in bad faith by the landlord, plus reasonable attorney fees awarded by a court (IA Code 562A.12(7))
“Normal Wear and Tear” vs. Damage in Iowa
- “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.
Security Deposits and Tax Filing in Iowa
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.
The Law on Security Deposits in Iowa
Iowa’s security deposit law is Iowa Code Annotated § 562A.12.
Tips for Iowa Landlords on the Right Practices for Security Deposits
- Do not charge a tenant a security deposit that is more than two month’s rent
- Return security deposits 30 days from the date the tenancy was terminated and receiving the tenant’s mailing address or delivery instructions
- Avoid paying double the original security deposit to the tenant by returning the security deposit at the required time, along with an itemized list of deductions
- Withhold security deposits for rent owed, damages and other expenses incurred during the recovery of the rental unit
- Seek damages in legal proceedings if the security deposit is insufficient to cover the losses caused by the tenant
Make sure to refer to Iowa Code Annotated § 562A.12 for more on security deposits. Landlords should educate themselves on this topic to protect their rental property and avoid any legal trouble.