In New York, the collection and return of security deposits are primarily regulated under NY Gen Oblig L § 7-103 . These laws provide a set of rules that New York landlords and property managers have to follow to protect all parties.
Maximum Security Deposit Charge in New York
According to the Housing Stability and Tenant Protection Act of 2019 New York landlords may only charge up to one month’s rent for a security deposit. The limit on the amount of security deposit only applies to non-rent stabilized residential units. Other rules apply to the following housing units:
- Units subject to the city rent and rehabilitation law or the emergency housing rent control law.
- Continuing care retirement communities.
- Assisted living providers.
- Adult care facilities.
- Recognized senior residential communities.
- Not-for-profit independent retirement communities.
Additional Pet Deposits. Under New York’s law, the landlord may ask for an additional pet deposit. However, people with disabilities who use service animals shall have full and equal access to housing. The landlord shall not discriminate and cannot ask 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 homes.
Security Deposit Holdings in New York
New York landlords are prohibited from commingling any security deposit received from any other funds that the landlords have. This is because the security deposit remains the property of the tenant and is only being held by the landlord in trust.
Should the landlord decide to place the security deposit in a bank, it must be in a bank that has an office in New York. Also, the landlord must notify the tenant in writing of the name and address of the bank, and the exact amount of security deposit that belongs to that tenant. The landlord can choose to put the security deposit in an account that earns interest or does not but whenever earned, the interest will accrue to the tenant.
However, if the landlord receives or is receiving security deposit from tenants of a property that has at least six family dwelling units, the landlord is required to place all security deposits in an interest-bearing account in a New York bank that earns interest at more or less the same rate as other similar accounts. Although not required, a landlord may voluntarily place the security deposit in an interest-bearing account and the same rules would apply as mentioned above.
Allowable Deductions on Security Deposits in New York
The landlord can only use the security deposit when the lease or tenancy ends or terminates. Also, the landlord can only use the security deposit to cover the following:
- Unpaid rent.
- Damage caused by the tenant beyond normal wear and tear.
- Unpaid utility charges provided in the lease.
- Costs of storing or moving the tenant’s belongings.
However, the landlord cannot deduct from the security deposit the cost of repairs or damage found in the initial inspection.
After signing the lease, the landlord must notify the tenant that they have the option of having an initial inspection of the unit so they can determine the exact condition of the unit.
Should there be an initial inspection, the parties must execute a written agreement before the tenant moves in. The agreement should state the condition of the unit and details of the existing defects and damages discovered during the initial inspection. The initial inspection agreement may be admissible for evidence related to the security deposit.
Can the tenant use the deposit as last month’s rent? Not usually, but if the lease agreement allows it.
“Normal Wear and Tear” vs. Damage in New York
Damage to the property that’s normal wear and tear will not be chargeable to the security deposit. So, it’s important to know the difference between the two:
- “Normal Wear and Tear” is the normal deterioration of the property that happens without negligence, carelessness, accident, misuse, or abuse by the tenant/tenants’ guests. Normal wear and tear can take on the form of gently worn carpets, loose door handles, fading wall paint and flooring, stained bath fixtures, lightly scratched glass, dirty grout and mold that occur naturally.
- “Damage” refers to the destruction that occurs because of abuse or negligence by a tenant during the course of the tenancy. It diminishes the usefulness, value or normal function of the rental unit. It can include pet damage, broken tiles, holes in the wall, broken windows and missing fixtures.
For a more in-depth discussion on the difference, check out our article on Normal Wear and Tear vs Damage here.
Returning Security Deposits in New York
Time Frame: The landlord has 14 days after the tenant vacates the premises to return the security deposit and itemized list.
Failure to Return the Security Deposit on Time: If the landlord fails to return the security deposit and/or the itemized list of deductions within the time allowed, the landlord loses the right to retain or make deductions from the security deposit.
The tenant may bring a small claims lawsuit but the maximum amount a tenant may sue for is $5,000. For village and justice courts, the limit is $3,000.
Also, if the landlord did not have good reason to withhold the security deposit or part of it (e.g., if the landlord misused the security deposit or simply refuses to return the same), the landlord may have to return the amount withheld plus a penalty of double the security deposit.
Security Deposits and Tax Filing in New York
How the security deposit will be treated tax-wise depends on whether or not the landlord gets to keep it (or part of it).
Taxable Income: Security deposits are not automatically considered income when the landlord receives them. The IRS advises to not include security deposits as income if the landlord may still be required to return the same. They only become taxable income when the landlord no longer has any obligation to refund them. For example, if the security deposit was given in 2021 but was only forfeited in 2022, then the landlord should only include it as income in 2022.
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:
- 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.
Additional Rules & Regulations in New York
Inspection Before the End of the Tenancy: The landlord is required to inform the tenant in writing that there is an option to have another inspection before vacating the premises. Should the tenant opt to have this inspection, the parties must have the inspection no earlier than two weeks but no later than one week before the end of the tenancy.
The landlord must also give the tenant at least 48 hours’ notice from the time of inspection. Upon the completion of the inspection, the landlord must give the tenant an itemized statement of all the repairs and cleanings the cost of which he intends to deduct from the security deposit. Giving the tenant the opportunity to repair or clean prior to vacating.
Interest Payments: New York landlords are not always required to pay interest on security deposits, unless it’s in an interest-bearing account. Landlords may keep 1% of the security deposit for every year as an administration fee. The landlord can return the security deposit and the interest at the end of the lease or apply it to the rent. If the lease ends before the bank pays interest, the landlord will only need to pay the tenant the interest they can collect at that time. Plus, the remainder of the security deposit after deductions.
New Property Owner’s Responsibility: The original landlord has five days after the sale of the property to do the following:
- Turn over the security deposit of the tenants in that property to the new owner.
- Notify the tenants of the transfer.
- Provide the tenants with the name and address of the new owner via certified mail.
If there is no transfer of the security deposits, the new owner can demand that the original landlord establish an escrow account and can contain one month’s rent for each rental unit. However, even if the original landlord has not transferred the security deposit, the new buyer is liable to the tenants for the amounts of security deposit that the new buyer has actual knowledge of plus interest thereon if any. The landlord has “actual knowledge” if the deposits were:
- Deposited six months immediately prior to the transfer of title.
- Acknowledged in any lease.
- Supported by documentary evidence provided by the tenant.
Number three above, refers to instances where there are units in the property where there is no record of a security deposit. In such cases, the new buyer must notify the tenants in those units within 30 days from the transfer of title of the following:
- There is no record of payment of the security deposit for the unit.
- The tenant has 30 days from the receipt of the notice to provide proof of the security deposit.
- Failure to provide proof will cause that tenant to lose any claim relating to security deposits.
The following are the accepted proofs of payment:
- A canceled check.
- Receipt from the old landlord.
- A statement of the same in a lease signed by the old landlord.
For additional questions about security deposits in New York, please refer to the official state legislation, New York General Obligation Law § 7-103 to § 7-109, for more information.
- 1 NY Gen Oblig L § 7-108
- 2 NY Gen Oblig L § 7-103
- 3 NY Gen Oblig L § 7-103
- 4 NY Gen Oblig L § 7-103
- 5 NY Gen Oblig L § 7-103
- 6 NY Gen Oblig L § 7-108
- 7 NY Gen Oblig L § 7-108
- 8 NY Gen Oblig L § 7-108
- 9 NY Gen Oblig L § 7-108
- 10 NY Gen Oblig L § 7-108
- 11 NY Gen Oblig L § 7-108
- 12 NY Gen Oblig L § 7-108
- 13 NY Gen Oblig L § 7-108
- 14 NY Gen Oblig L § 7-108
- 15 NY Gen Oblig L § 7-108
- 16 NY Gen Oblig L § 7-103
- 17 NY Gen Oblig L § 7-105
- 18 NY Gen Oblig L § 7-108
- 19 NY Gen Oblig L § 7-108