Kentucky has certain rules and regulations about the handling and returning of a tenant’s security deposit. Landlords should familiarize themselves with these statewide regulations and understand their responsibilities.
Quick Facts for Kentucky
- Maximum Amount: No statutory limits
- Duration for Return: 60 days after end of lease
- Penalty for Inaccurate Damage List: Tenant can take court action against landlord
- Deadline to Claim Funds: 60 days; after this, tenants forfeit their right to a refund
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.
Inspection Before Tendering Security Deposit
Before paying a security deposit, Kentucky landlords should present prospective tenants with a comprehensive list of any then-existing damage to the rental unit.
Tenants have a right to inspect the premises to ascertain the accuracy of the list of damages before occupying the rental unit. Both and lord and tenant are required to sign the listing in agreement of the accuracy of the listing, but not conclusive evidence of the absence of hidden defects.
A tenant who refuses to sign the listing should state specifically in writing the items on the list that they disagree with and sign in disapproval of the damages presented (KRS 383.580 (1)).
Allowable Security Deposit Charge in Kentucky
Kentucky landlords are not bound by a specific limit on how much they can charge a tenant for security deposits.
Security Deposit Rules & Regulations for Landlords in Kentucky
- Storing Security Deposit: Kentucky landlords who rent a residential property are required to place a tenant’s security deposit in an account in any bank or other lending institution regulated by the state of Kentucky or by the United States Government. Prospective tenants should be informed of the location where the security deposit is held and the account number (KRS 383.580 (2)).
- Allowable Deductions From Security Deposit: Kentucky landlords can make certain deductions from a tenant’s security deposit, including:
- Unpaid Rent
- Damage in excess of normal wear and tear
- Other breaches of the lease agreement
- 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. However, if a tenant vacates a rental unit without paying the last month’s rent and does not demand a refund of the security deposit, the landlord may, after thirty (30) days, remove the deposit from the account and apply it as payment for the last month’s rent (KRS 383.580 (6)).
- How to Get Full Refund: When the tenancy ends, 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. The tenant may also get their full deposit returned if the landlord fails to place the security deposit in a Kentucky or U.S-regulated banking institution, or provide the tenant with a list of damages before occupancy and at the end of the tenant’s occupancy.
- Rental Unit Change Ownership: If the property changes ownership during the period of a tenant’s rental agreement, the landlord can either return the security deposit to the tenant, or transfer it to the new owner, who becomes responsible for the security deposit and returning it to the tenant at the end of the tenancy.
Returning Security Deposits in Kentucky
When a tenant’s occupancy is terminated, the landlord has the right to inspect the premises and create a comprehensive list of any damage to the rental unit. The tenant also has a right to inspect the premises to validate the accuracy of the list of damages. If both the landlord and tenant agree that the list of damages is accurate, they are required to sign in agreement. If the tenant refuses to sign the list of damages presented by the landlord, he/she must provide a written statement highlighting the specific damages on the list that he/she disagrees with and sign (KRS 383.580 (3)).
If the tenant fails to sign the list of damages or specify the disagreement with the accuracy of the list, he/she loses the right to recover any damages.
- Unclaimed Deposits: If the tenant leaves the premises not owing rent and having any refund due, the landlord is required to send notification to the last known or reasonably determinable address of the tenant, of the amount of any refund due. If the landlord doesn’t receive a response from the tenant within sixty (60) days of sending the notification, the tenant forfeits any right to the security deposit. The landlord can remove the deposit from the account and claim it.
- Landlord Loses Right to Security Deposit: There are certain instances where a landlord forfeits his/her right to a tenant’s security deposit:
- If the landlord did not place the security deposit in a separate account in a banking institution regulated by the state of Kentucky or by the United States Government and notify the tenant
- If the landlord didn’t provide the tenant with a list of pre-existing damages to the rental unit before tenant occupancy
- If the landlord didn’t provide the tenant with a list of the damages existing at the end of the tenant’s occupancy of the rental unit
- Tenants Take Court Action: A tenant who disagrees with the accuracy of the final damage list and signs the listing may take court action against the landlord. Tenant’s claim should be limited to those damages that the tenant specifically disagreed with on the list (KRS 383.580 (5)).
“Normal Wear and Tear” vs. Damage in Kentucky
- “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 Kentucky
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 Kentucky
Kentucky Revised Statutes (KRS) § 383.580 provides the text that covers Kentucky security deposit law.
Tips for Kentucky Landlords on the Right Practices for Security Deposits
- Charge a reasonable amount for security deposits since there are no established statutory limits
- Inform tenants of the account number and bank where the deposit is being held
- Provide tenants with a list of pre-existing damages to the rental unit before tenant occupancy and at the end of the tenancy
- Return security deposits within 60 days if no monies are owed
- Withhold security deposits for any financial losses, damage or other expenses
- Seek damages in legal proceedings if there is a dispute on the security deposit
Make sure to refer to the Kentucky Revised Statutes (KRS) § 383.580 for more on security deposits. Landlords should educate themselves on this topic to protect their rental property and avoid any legal trouble.