Maryland landlords should familiarize themselves with the statewide regulations that govern security deposits in the state and understand their responsibilities.
Quick Facts for Maryland
- Maximum Amount: Not more than two months’ rent
- Penalty for Overcharging: Tenant to be paid thrice the amount charged
- Duration for Return: Within 45 days from end of tenancy
- Walk-through Inspection: Required, with tenant’s presence
Purpose of a Security Deposit
Maryland defines “security deposit” as any payment of money, including payment of the last month’s rent in advance, that is given to a landlord by a tenant for the purpose of protecting the landlord against unpaid rent, damage due to breach of the lease, or damage to the rental unit, common areas, major appliances and furnishings (MD Real Prop Code §8–203(3)). 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 Maryland
A Maryland landlord can charge a tenant a security deposit that is the amount of two months’ rent. If a landlord charges a tenant a security deposit that is more than two months’ rent, the tenant may recover up to three times the amount charged, plus reasonable attorney’s fees if court action is involved. A tenant can bring an action against a landlord for unfair payment at any time during the tenancy or within two years after its termination (MD Real Prop Code §8–203 (b) (1) (2) (3)).
Security Deposit Rules & Regulations in Maryland
- Receipt Requirement: The landlord is required to give the tenant a receipt for the security deposit, and the receipt should be included in a written lease (MD Real Prop Code §8–203 (c) (1) (2) (3)).
- Storing Security Deposits: Maryland landlords are required to hold all security deposits in a federally insured financial institution located within the State. The accounts should be kept exclusively for holding the security deposits and bear interest. The security deposit should be deposited in an account within 30 days after receipt by the landlord (MD Real Prop Code §8–203 (d) (1)).
A landlord may also hold the security deposits in insured certificates of deposit at federally insured financial institutions located in the State, or in securities issued by the federal government or the State of Maryland (MD Real Prop Code §8–203 (d) (2)).
- Security Deposit Interest: The account that the security deposit is held in should bear interest. This simple interest should grow at the daily U.S. Treasury yield curve rate for 1 year, or at 1.5% a year. The interest should grow at monthly intervals from the day the tenant gives the landlord the security deposit. Landlords must hold a tenant’s security deposit for at least six months, or a full month before any interest is payable and only on security deposits of $50 or more (MD Real Prop Code §8–203 (e) (1) (2) (3)).
- Allowable Deductions from Security Deposit: In Maryland, landlords are allowed to make deductions from a tenant’s security deposit to cover (MD Real Prop Code §8–203 (f) (1) (i)):
- Unpaid Rent
- Damage in excess of normal wear and tear to the rental unit, common areas, major appliances, and furnishings owned by the landlord
- Damage due to breach of lease
- Applying Security Deposit as Last Month’s Rent: A security deposit is not intended to be used to cover a tenant’s last month’s rent. However, that provision could be established in the rental agreement if the landlord agrees.
- How to Get Full Refund: 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, all charges in the rental agreement are covered and any financial loss from a breach of the contract is recovered.
- Rental Unit Change Ownership: If the rental unit changes ownership through a sale or transfer, the landlord will remain responsible to the tenant and the prospective owner for the maintenance of the security deposit, as well as withholding and returning the security deposit, all or in part, plus any interest until the transfer is completed. A landlord who is unable to transfer a tenant’s security deposit, whether in part or in full, to the new owner, will still be held liable for any portion that has not been transferred.
Returning Security Deposits in Maryland
- Time Frame:Within 45 days after the tenancy ends, the landlord must return the security deposit to the tenant, plus any simple interest that has accrued during the period of the tenancy (MD Real Prop Code §8–203 (e) (1)).
- Walk-through Inspection: The tenant has the right to be present when the landlord inspects the rental unit for damages, if the tenant notifies the landlord by certified mail of his/her intention to move, the date of move-out and the tenant’s new address. The notice should be mailed at least 15 days before the move-out date.
When the landlord receives the notice, he/she must notify the tenant by certified mail of the time and date when the rental unit will be inspected. The inspection date should be set for five days before or five days after the move-out date established by the tenant. The landlord should inform the tenant in writing, at the time the security deposit is paid, of his/her right to be present for a walk-through inspection of the rental unit. If the landlord fails to inform the tenant of their rights, he/she forfeits the right to withhold any part of the security deposit for damages (MD Real Prop Code §8–203 (f) (1)).
Withholding Security Deposits in Maryland
Maryland landlords have a right to withhold the security deposit, all or in part, for unpaid rent, damage caused by a breach of lease, or for damage in excess of ordinary wear and tear to the rental unit, common areas, major appliances, and furnishings owned by the landlord.
If any portion of the security deposit is withheld, the landlord is required to provide the tenant with a written list of the damages along with a statement of the cost of each delivered by first-class mail to the last known address of the tenant, within 45 days after the tenancy has ended.
If the landlord fails to provide the tenant with a written statement, he/she forfeits the right to withhold any part of the security deposit for any damage caused by the tenant.
“Normal Wear and Tear” vs. Damage in Maryland
- “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 Maryland
What happens to the security deposits when the lease is terminated depends on whether it is refunded or it is withheld by the landlord.
- 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 Maryland
Maryland security deposit statutes can be found in MD Real Prop Code § 8-203.
Tips for Maryland Landlords on the Right Practices for Security Deposits
- Charge tenants two month’s rent for a security deposit
- Provide tenants with a receipt for the security deposit and include it in a written lease
- Return security deposits within 45 days of terminating the tenancy
- Withhold security deposits for unpaid rent, damages and cost related to a breach of lease agreement
- Seek damages in legal proceedings if the security deposit is insufficient to cover the losses caused by the tenant
A security deposit is an essential part of the leasing process. Landlords and tenants alike should know Maryland’s security deposit law and how it applies to them. Landlords have a responsibility to properly maintain, store and handle tenants’ security deposit as dictated by the law. Tenants should also know their rights as it relates to security deposits and be able to protect their security deposit.
Make sure to refer to the Maryland Real Property Code §8-203 for more on security deposits. Landlords should educate themselves on this topic to protect their rental property and avoid any legal trouble.