Landlords should familiarize themselves with the statewide regulations that govern security deposits in Michigan and understand their responsibilities.
Quick Facts for Michigan
- Maximum Amount: Cannot exceed 1 1/2 months’ rent
- Duration for Return: Within 30 days after termination of tenancy
- Penalty for Late Notice: Forfeiture of rights to claim damages & full refund to tenant
- Deadline to Take Court Action for Damages: 45 days after termination of tenancy
Purpose of a Security Deposit
Michigan defines a “security deposit” as any amount, paid by the tenant to the landlord or agent to be held by the landlord for the duration of the rental agreement, or any part of the term, that is returnable to the tenant on condition of return established in the rental agreement (MCL 554.601 (e)).
The security deposit serves as a safety net for landlords in the event that they suffer financial losses caused by a tenant that may include damage to the rental property, unpaid rent or other breach of the lease agreement.
Michigan establishes that the security deposit is the legal property of the tenant until the landlord claims a right to the deposit or a portion of it (MCL 554.605).
Allowable Security Deposit Charge in Michigan
Michigan landlords must only charge a tenant a security deposit that is no more than 1 1/2 months’ rent (MCL 554.602).
Security Deposit Rules & Regulations in Michigan
- Giving Notice: A landlord is required to notify a tenant in writing, within 14 days from the date the tenant takes occupancy of the rental unit, of the name and address of the financial institution where the security deposit is held, or that of the surety (MCL 554.603).
- Storage: Michigan landlords are required to keep a tenant’s security deposit in an account in a regulated financial institution. A landlord may allow a tenant to use a surety bond as an alternative. The bond is for the benefit of the tenant and not the landlord (MCL 554.604).
- Allowable Deductions: In Michigan, landlords are allowed to make the following deductions from a tenant’s security deposit:
- Actual damages to the rental property or any additional facility that is in excess of normal wear and tear.
- Unpaid rent, rent due for premature termination of the rental agreement
- Unpaid utility
- Inventory Checklists: The landlord is required to produce inventory checklists both at the beginning and end of the tenancy, which highlights the condition of the rental property (MCL 554.608 (1)).
- At the beginning of the lease, the landlord is required to provide the tenant with 2 blank copies of an inventory checklist at the beginning of the lease, which should be identical to the form used for the termination inventory checklist. The checklist should “include all items in the rental unit that the landlord owns, including, but not limited to, carpeting, draperies, appliances, windows, furniture, walls, closets, shelves, paint, doors, plumbing fixtures and electrical fixtures” (MCL 554.608 (2)).
- The tenant is required to review the checklist, note the condition of the property and return 1 copy of the checklist to the landlord within 7 days after moving into the rental unit, unless the landlord and tenant agree to complete the inventory checklist within a shorter time-frame (MCL 554.608 (3)).
- Tenants are allowed to make to request and receive a copy of the last termination inventory checklist which shows the claims that were chargeable to the last prior tenant (MCL 554.608 (4)).
- When the tenancy ends, the landlord should complete a termination inventory checklist and list all the damages caused by the tenant (MCL 554.608 (5)).
- 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.
- 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: In the event that the rental unit changes ownership through sale or transfer, or some other way, the landlord is responsible for the security deposit until the following has happened (MCL 554.614 ):
- The security deposit has been transferred to the new owner and a written notification of the transfer and the new owner’s name and address
- The security deposit is returned to the tenant
Returning Security Deposits in Michigan
In the event that the tenant causes damage to the rental unit or other breach of the rental agreement, the landlord should mail an itemized list of damages to the tenant within 30 days after the termination of the tenancy. The itemized list should provide the estimated cost of repair of each damaged item and the amounts (554.609).
- Time Frame: The landlord should return the landlord’s security deposit, all or in part, within 30 days of the tenancy termination. Accompanying the itemized list should be a check or money order with the remainder of the security deposit after deductions, if any(554.609).
- Penalty for Non-compliance: If a landlord fails to provide the notice of damages requirement within 30 days after the termination of tenancy, the landlord forfeits his/her right to claim damages, and the tenant is entitled to a return of the full security deposit (MCL 554.610).
- Tenant Response Time: When the tenant receives the list of damages, he/she is required to respond in writing by ordinary mail within 7 days, indicating in detail agreement or disagreement to the damage charges listed. The date of mailing is considered the date of the tenant’s response (MCL 554.612).
- Notice of Forwarding Address: The tenant has four days after the termination of the tenancy to provide the landlord with a forwarding address in writing. If the tenant fails to provide the landlord with a forwarding address, the landlord is not required to give notice of damages, but the tenant can still claim the security deposit (MCL 554.611).
- Landlord Action for Damages: A landlord has 45 days after termination of the tenancy to take action against a tenant to recover damages in a court. A landlord cannot be entitled to retain any portion of a tenant’s security deposit for damages unless he/she has first obtained a money judgment or filed with the court sufficient proof of an inability to recover damages from the tenant.
The exception exists in cases where (MCL 554.613):
- The tenant doesn’t provide a forwarding address
- The tenant fails to respond to the notice of damages
- The landlord and tenant have agreed in writing to the use of the balance of the deposit claimed by the landlord.
“Normal Wear and Tear” vs. Damage in Michigan
- “Normal wear and tear” as 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 Michigan
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 Michigan
Michigan security deposit law is found in Michigan Compiled Laws §§554.601-616.
Tips for Michigan Landlords on the Right Practices for Security Deposits
- Charge a tenant only 1/2 months’ rent for the security deposit
- Notify a tenant within 14 days of occupying the rental unit of the name and address of the financial institution where the security deposit is held, or that of the surety
- Return a tenant’s security deposit or any remainder within 30 days, and provide an itemized statement of deductions, if any
- Withhold security deposits for unpaid rent , unpaid utility and damage in excess of normal wear and tear
- Seek damages in legal proceedings if the security deposit is insufficient to cover the losses caused by the tenant
Make sure to refer to the Michigan Compiled Laws §§554.601-616 for more on security deposits. Landlords should educate themselves on this topic to protect their rental property and avoid any legal trouble.