In Minnesota, the collection and return of security deposits are primarily regulated under MN Stat § 386.78. These laws provide a set of rules that Minnesota landlords and property managers have to follow to protect all parties.
Maximum Security Deposit Charge in Minnesota
In Minnesota, there are no limits on how much a landlord may charge as a security deposit.
Additional Pet Deposits: Landlords generally charge between one and two months’ rent as a security deposit, with another month’s rent for a pet deposit. Under Minnesota’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.
In a multiunit residential building, a tenant of a disability accessible unit, in which the tenant receives a subsidy that directly reduces the tenant’s rent responsibility, must be allowed to have two birds or one spayed or neutered dog or one spayed or neutered cat. A renter under this section may not keep or have visits from an animal that constitutes a threat to the health or safety of others or causes a noise nuisance. The deposit is refundable to the extent it exceeds the amount of damages caused by the animal.
Increase in Security Deposits: Landlords in Minnesota may increase the amount of the security deposit at any time during a month-to-month rental agreement, meaning that there is no final date of end of tenancy in the rental agreement. The tenant must be given proper written notice in advance, usually the time frame is one rental period plus one day. If there is an end of tenancy date in the rental agreement, the landlord may not change the price of the security deposit, unless both parties are in agreement of the change.
Security Deposit Withholding for Wrongfully Quit Dwellings in Minnesota
If a tenant wrongfully quits the lease by abandoning the property without proper notice or paying the final month’s rent, the landlord may retain an amount equal to the portion rightfully withheld plus interest in addition to still collecting the final month’s rent. The only exception is if the tenant and landlord have entered into an oral or written month-to-month rental agreement. If the tenant remains in violation after a written notice and demand have been delivered, the tenant shall be liable for the following:
- A penalty in the amount equal to the portion rightfully withheld of the deposit; and
- Interest on the entire security deposit, plus the amount of rent withheld by the tenant.
The landlord may bring action in conciliation court in the rental property’s county to recover the security deposit and any other additional costs.
Required Disclosures Before Collecting a Security Deposit in Minnesota
Before a landlord may collect a security deposit from a tenant, they must provide notice to the tenant in the case of a pending foreclosure or health code violation that threatens the health of a tenant which has exceeded its timeline for repair.
Pending foreclosures that are not reported to the tenant prior to collecting a security deposit may incur a $500 fine unless the title holder agrees not to terminate the contract upon foreclosure or the tenant is not required to prepay rent for months exceeding the date of foreclosure.
Health code violations that are not reported to the tenant before their security deposit is collected are subject to damages awarded by the court unless the repairs are completed before tenancy begins.
Allowable Deductions on Security Deposits in Minnesota
The landlord may use the security deposit to make deductions only after the tenant has vacated the premises. It should be used to cover:
- Unpaid rent.
- Unpaid bills.
- Costs of damage associated with returning the property to the condition it was received in due to the tenant’s negligence of their obligations as a tenant. These should NOT include conditions that are considered be standard wear and tear.
Can the deposit be used by the tenant as last month’s rent?
In Minnesota, the security deposit may not be used as the last month’s rent with the exception of month-to-month leases where the landlord and tenant agree on terms.
“Normal Wear and Tear” vs. Damage in Minnesota
- “Normal Wear and Tear” is defined as deterioration that occurs as a result of regular use of a rental unit that 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, damaged blinds, fading wall paint, lightly scuffed flooring, stained bath fixtures, and other minor wear that occurs 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, which affects the landlord’s ability to rent the unit after tenancy is terminated. Pet damage (heavily stained and ripped carpet), broken tiles, hole in the wall, broken windows and missing fixtures are all examples of damage.
Check out our article on wear and tear vs. damage to get a better idea of the difference.
The landlord can only charge the cost of repairs if the damage was caused by the failure of the tenant to comply with obligations outlined in the lease.
To comply with obligations as a tenant, they must:
- Keep the premises, including all plumbing fixtures, clean and safe.
- Dispose of garbage and other waste in a clean and safe manner.
- Use all facilities (e.g., electrical, plumbing, heating, etc.) and appliances reasonably.
- Maintain smoke detection and/or carbon monoxide detection devices.
- Comply with the maximum number of persons allowed to occupy the premises.
- Leave the premises in the same condition it was in when it was handed to the tenant.
Tenant’s may not:
- Deliberately and negligently destroy, damage, or remove parts of the premises.
- Make repairs that are not approved by the landlord in writing.
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 Minnesota
Time Frame: A Minnesota landlord has 21 days to return any unused portion of the security deposit plus interest along with an itemized list of damages deducted, which should be sent via first-class, certified mail to the forwarding address provided to the landlord or in person.
In the case of termination due to condemnation of the property, the limit is reduced to five days from move-out.
Failure to Return Security Deposit as Required: If the landlord refuses or fails to return the security deposit within the 21-day limit or does not include the written deductions, the tenant stands to recover twice the amount wrongfully withheld deposit and an extra $500 for damages if the withholding is with bad faith, plus any legal fees associated with recovering the deposit in court.
Bad faith is established when the landlord unlawfully withholds any portion of the deposit or disobeys security deposit law within two weeks of the commencement of action by the tenant to recover the funds.
Security Deposits and Tax Filing in Minnesota
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 to follow:
- 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.
- If 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 Minnesota
Receipt Requirements: The landlord is not required to provide a receipt for the security deposit in Minnesota unless it is paid in cash.
Security Deposit Holdings in Minnesota: Minnesota laws do not require landlords to hold security deposits separate from other funds.
Security Deposit Interest in Minnesota: Minnesota laws must provide 1% simple interest on held security deposits. Interest shall be calculated from the first day of the next month following the full payment of the security deposit to the last day of the month in which the landlord returns the security deposit or the date upon which judgment is entered in any civil action involving the landlord’s liability for the deposit.
Pre-Lease Deposits: A “pre-lease deposit” refers to payment from the prospective tenant before the prospective tenant and landlord have entered into a rental agreement. A pre-lease deposit may be accepted if there is a written agreement that states the circumstances that the pre-lease deposit will be returned via mail within seven days, with the exception that the prospective tenants request, the landlord destroys the pre-lease deposit or returns it in person. If a landlord violates any requirements of the pre-lease deposit, the prospective tenant may receive the amount of the pre-lease deposit, plus one-half of that amount as a penalty towards the landlord.
New Property Owner’s Responsibility: If the rental unit changes ownership through a sale or transfer, the landlord has 60 days after termination of ownership to return the tenant’s security deposit, or provide an accounting of the security deposit. The landlord is required to do one of the following in order to not be liable for the security deposit:
- Transfer the security deposit, or any remainder after deductions, with any interest gained, to the new owner;
- Notify the tenant of the transfer and of the new owners name and address; or
- Return the deposit, or any remainder after deductions, with any interest earned.
For additional questions about security deposits in Minnesota, please refer to the official state legislation, Minnesota Landlord-Tenant Statutes