In Kentucky, the collection and return of security deposits are primarily regulated under KY Rev. Stat. § 383.580. These laws provide a set of rules that Kentucky landlords and property managers have to follow to protect all parties.
Maximum Security Deposit Charge in Kentucky
In Kentucky, there are no limits on how much a landlord may charge as a security deposit (or pet fee) if it is stated in the lease agreement. Landlords generally charge between one and two months’ rent as a security deposit, with another month’s rent for a pet deposit.
Additional Pet Deposit: Under Kentucky’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.
Move-In and Move-Out Checklist Requirements for Kentucky Security Deposits
Kentucky law requires that all lease agreements which demand a security deposit to be collected must include a move-in checklist that outlines the current condition of the property and estimates cost of repairing certain damages. This document must be signed by both parties with approval or disapproval of damages. This will be used to determine if a deduction is valid at the end of the lease. If the tenant refuses to sign the document, the tenant must state in writing the items on the list which they disagree with and sign such document.
If no move-in checklist is completed prior to collecting the security deposit, the landlord forfeits the right to make deductions at the end of the lease. They must also itemize all deductions that are made as part of the move-out checklist to enforce the deductions.
Security Deposit Holding Requirements in Kentucky
When it comes to collecting and holding the deposit, Kentucky landlords are required to follow the state statutes on security deposits.
Receipt Requirements: The landlord is required to provide a receipt for the security deposit in Kentucky which outlines where the security deposit is held, including the account number.
Security Deposit Holdings in Kentucky: Kentucky security deposits must be held in separate accounts with any agency of the United States government or Kentucky bank or lending institution and may not be commingled with other funds. Tenants shall be informed of the location and name of the separate account and account number. If the landlord does not place the security deposit in a separate account, they shall not be entitled to retain any amount of the security deposit.
Security Deposit Interest in Kentucky: Kentucky laws do not require landlords to provide interest on held security deposits.
Allowable Deductions on Security Deposits in Kentucky
The landlord may use the security deposit to make deductions only after the tenant has vacated the premises. The security deposit should be used to cover:
- Unpaid rent.
- Reasons listed in the lease agreement.
- Costs of damage caused by the tenant’s failure to comply with obligations as a tenant but not those considered to be standard wear and tear.
Can the deposit be used by the tenant as last month’s rent?
The deposit may be used as the last month’s rent only if both parties agree in the lease agreement OR the tenant does not demand the return of their security deposit while balance is outstanding after lease termination.
“Normal Wear and Tear” vs. Damage in Kentucky
- “Normal Wear and Tear“ refers to the deterioration of property that happens when the property is used as it was meant to be used by the tenant and allowable guests. Wear is non-deductible 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 older appliances breaking down, carpets thinning, light scratches on walls or doors, and other minor physical damage as a result of everyday living.
- “Damage” refers to destruction to the rental unit which occurs due abuse or negligence by a tenant during the course of the tenancy. Damage can affect usefulness, value, and normal function of the rental unit which includes removal of property or failure to upkeep essential home systems. Pet damage (heavily stained and ripped carpet), broken tiles, hole in the wall, broken windows and missing fixtures are all further examples of damage.
Check out our article on wear and tear vs. damage to get a better idea of the difference.
A tenant is under certain obligations when they sign their lease agreement. If the tenant does not comply with these obligations, they are subject to damages that occur as a result of negligence. To comply with these obligations under the said rule, the tenant must:
- Comply with all building and housing codes regarding health and safety;
- Keep the premises, including all plumbing fixtures, clean and safe;
- Dispose of garbage and other waste in a clean and safe manner; and
- Use all facilities (e.g., electrical, plumbing, heating) and appliances reasonably.
From time to time, a landlord may change or adopt new rules. The landlord has the right to any rule changes as long as they are fore safety and the welfare of the tenant or protect the property. If there is a new rule after the tenant has signed the rental agreement, the tenant must consent to the new rule in writing. In addition to obligations, the tenant also has responsibility to leave the property in the condition it was delivered. Therefore, the tenant must not:
- Deliberately or negligently destroy, damage, or remove parts of the premises; and
- Unreasonably disturb the neighbor’s peaceful enjoyment of the premises.
If the damage to the premises was caused by the tenant’s failure to comply with any of the above, then the landlord may take the cost of repairing it from the security deposit.
Returning Security Deposits in Kentucky
Time Frame: Kentucky landlords have 30 days to notify the tenant of any deductions made and provide the balance of their security deposit which may be reclaimed. If the tenant vacates without paying last month’s rent and does not demand a return of the security deposit, the landlord may remove the deposit from the account and apply the security deposit to the unpaid rent in 30 days.
If the tenant vacates the premises and has paid all rent, the landlord shall send a notice (including any amount of the refundable security deposit) to the last known address of the tenant. If the tenant doesn’t acknowledge the notice from the landlord within 60 days of the notice, the landlord may remove the security deposit from the account and may keep the remaining funds.
Failure to Return Security Deposit as Required: If the landlord refuses or fails to return the security deposit within the 30-day limit, the tenant stands to recover any unlawfully retained funds, plus any legal fees associated with recovering the deposit in court.
Security Deposits and Tax Filing in Kentucky
Whether a security deposit will be treated as taxable or not depends on if the deposit is used or returned.
Taxable Income: Security deposits are not automatically considered income upon collection at the beginning of tenancy. They only become taxable income when the landlord no longer has any obligation to refund them (such as for settling damages incurred). At this point they may also qualify as a write-off for tax purposes as well.
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:
- 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.
- 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 Kentucky
New Property Owner’s Responsibility: If the original landlord decides to sell or transfer ownership of the rental property, he or she is required to assume responsibility for the security deposit funds and their return. The new landlord may not change the deposit or terms of the lease agreement until a new lease is signed.
For additional questions about security deposits in Kentucky, please refer to the official state legislation, Kentucky Landlord-Tenant Statutes.