Landlords should familiarize themselves with the statewide regulations that govern security deposits in Minnesota and understand their responsibilities.
Quick Facts for Minnesota
- Maximum Amount: No statutory limit
- Duration for Return: Within 3 weeks after tenant vacates rental unit
- Duration for Return (Tenant Vacates due to Unit Condemnation): Within 5 days from tenant moveout
- Penalty for Late Returns: Pay double the amount withheld (plus any interest earned) & $500 for damages
Purpose of a Security Deposit
A security deposit is any money that is used to secure a tenant’s adherence to a rental agreement or any part of the 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.
Allowable Security Deposit Charge in Minnesota
Minnesota doesn’t have a statutory limit at the state level on the amount that a landlord can charge a tenant for a security deposit.
Security Deposit Rules & Regulations in Minnesota
- Security Deposit Interest: The landlord should hold a tenant’s security deposit in an interest-bearing account, where it should bear simple interest at the rate of 1% yearly (Subd 2).
- Allowable Deductions: In Minnesota, landlords are allowed to make deductions from a tenant’s security deposit to cover (Subd3):
- Unpaid rent
- Damage in excess of ordinary wear and tear excepted
- Other Breaches of the Lease Agreement
- 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. A tenant cannot withhold last month’s rent on the ground that the security deposit serves as payment for the rent (Subd 8).
- Tenant Withholding Rent: If a tenant doesn’t pay the landlord the last month’s rent after a written demand and notice, he/she will have to (Subd 8 (1) (2):
- Pay the landlord an amount equal to the portion of the security deposit which the landlord has a right to withhold, other than the rent that is due
- Pay Interest on the whole deposit, plus the rent that is due
- How to Get a 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 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 (Subd 6):
- 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
- Return the deposit, or any remainder after deductions, with any interest earned
Returning Security Deposits in Minnesota
After the landlord receives the tenant’s mailing address or delivery instructions, he/she should return the deposit to the tenant, with any interest earned, or if making deductions from the deposit or any portion, provide the tenant with a written statement showing the specific reason for the withholding. The security deposit must be returned via first-class, certified mail, to the forwarding address provided by the tenant, or delivered to the tenant in person within the time required (Subd 3 (b)).
- Time-Frame: A Minnesota landlord must generally return a tenant’s security deposit within three weeks after a tenant has vacated the rental unit. In the case that the tenant moves out because the rental building or the tenant’s unit is legally condemned and is not a result of the tenant’s willful, malicious, or irresponsible conduct, the landlord has only five days from the time the tenant vacates the unit to return the tenant’s security deposit.
- Failure to Return Security Deposit as Required: A landlord who fails to adhere to the requirements as they relate to the security deposit, such as:
- Providing a written statement to the tenant within three weeks after the tenancy ends
- Provide the tenant with a written statement within five days of the tenant vacating the rental unit as a result of condemnation, or
- Transfering or return the security deposit as required after receiving the tenant’s mailing address or delivery instructions,
will have to pay the tenant twice the amount of the security deposit withheld by the landlord and any interest earned and an additional $500 for damages (Subd (4), (7)).
“Normal Wear and Tear” vs. Damage in Minnesota
- “Normal wear and tear” is defined 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 Minnesota
A security deposit can either be held to cover losses suffered by the landlord or refunded to the tenant, all or in part. What happens at the end of the tenancy determines how a security deposit is treated for tax purposes.
- 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 Minnesota
Minnesota security deposit law can be found in Minnesota Statutes Annotated §§ 504B.178.
Tips for Minnesota Landlords on the Right Practices for Security Deposits
- Charge tenants a reasonable amount that is also an appropriate amount for a security deposit
- Provide tenants with a receipt for the security deposit
- Return security deposits within three weeks after a tenant has vacated the rental unit, or five days if the building or rental unit is legally condemned
- 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
Make sure to refer to the Minnesota Statutes Annotated §§ 504B.178 for more on security deposits. Landlords should educate themselves on this topic to protect their rental property and avoid any legal trouble.