Purpose. Security deposits are like safety nets. They ensure compensation for any loss that the landlord might incur because of the tenant’s acts. It covers for incidents like damage to the property, termination of the lease without notice or non-payment of rent.
Legal Basics. There is no limit on the amount Tennessee landlords can charge as security deposit from which unpaid rent, cost of damage to the unit, and other amounts owing to the landlord may be deducted. The excess must be refunded to the tenant.
Maximum Security Deposit Charge in Tennessee
According to state security deposit laws, there is no limit on the amount that Tennessee landlords can charge as security deposit. However, it is best to check local county or city ordinances which may put a limit on security deposit amounts.
Security Deposit Holdings in Tennessee
Landlords are not allowed to mix tenants’ security deposits with other funds. In Tennessee, landlords are required to place security deposits from tenants in an account used only for keeping security deposits in a bank or other recognized lending institution. If the landlord fails to comply with this requirement, the landlord will not be allowed to make deductions from the security deposit.
Upon signing the lease, the landlord is required to inform the tenant of the details of where and how the latter’s security deposit is or will be held. Note, however, that the landlord is not required to disclose the account number of the account that holds the security deposit.
Allowable Deductions on Security Deposits in Tennessee
At the end of the lease, the landlord may deduct the following from the security deposit:
- Unpaid rent;
- Other amounts due and owing to the landlord;
- Cost of damage to the unit found during the inspection (read more); and
- Cost of damage to the unit not found during the inspection.
To clarify item number 4 above, damage to the unit that was not found during the inspection (and therefore not included in the list of charges from the inspection) will only be chargeable to the security deposit if the same was identified within 30 days after the tenant moved out or within 7 days after the subsequent tenant moved in, whichever is earlier.
Inspection as Basis for Charges Against the Security Deposit
Charges from the security deposit should be based on an inspection of the unit at the end of the tenancy. Upon request by the landlord for the tenant to vacate the unit or within 5 days of the tenant’s notice to vacate, the landlord must provide the tenant with a notice of the latter’s right to be present during the inspection and that the inspection may be scheduled during normal business hours. The landlord may require that the inspection be after the tenant has vacated the unit, but in such cases, the inspection must be done within 4 days after the tenant moves out.
After the inspection, the landlord must provide the tenant with a comprehensive list of all identifiable damage at the time. Both parties must sign the list and those signatures will serve as evidence of the authenticity of the charges stated in it. If there are charges to which the tenant does not agree, the tenant may instead indicate which parts or items in the list the tenant does not agree with. Any future disputes will be limited to those that the tenant disputed there.
If the tenant requested to be present during the inspection but failed to show up for it, the tenant loses the right to dispute the damage found after the inspection. Also, the tenant will not have a right to be present during the inspection if the tenant:
- Abandons the unit;
- Vacates the unit without giving written notice;
- Did not respond to the landlord’s notice of the latter’s right to be present during the inspection; or
- Failed to appear during the inspection.
Can the Security Deposit be used as Last Month’s Rent? The security deposit is not meant to be applied to the last month’s rent. However, if there is a written agreement between the tenant and the landlord allowing the tenant to do so, it can be done.
Failure to provide this checklist: If the landlord does not provide the tenant with this checklist will cause the landlord to forfeit the right to make deductions from the security deposit.
Normal Wear and Tear Vs Damage
The charges do not include damage due to wear and tear. Below, we compare the difference between “Normal Wear and Tear” and Damage.
- “Normal wear and tear” refer to minor issues that occur naturally as a result of the tenant using the property as it’s designed to be used, aging, and expected decline as a result of everyday living. These minor issues can include gently worn carpets, loose door handles, fading wall paint and flooring, stained bath fixtures, lightly scratched glass, and dirty grout and even mold.
- “Damage” refers to the destruction that is a result of abuse, negligence or carelessness by a tenant during the tenancy period. Damage to the rental property can negatively impact its usefulness, value, normal function. Damage can include pet damage (heavily stained and ripped carpet), broken tiles, hole in the wall, broken windows and missing fixtures.
Check out our article on wear and tear vs. damage to get a better idea of the difference.
Returning Security Deposits in Tennessee
Time Frame: Tennessee landlords are required to return a tenant’s security deposit or any part of it that is left after making the allowed deductions. Landlords are typically required to return the same within 30 to 60 days of the tenant’s move-out date. If there is any refund due to the tenant, the landlord must notify the tenant of the same.
Unclaimed Deposits: If the landlord does not receive any response from the tenant regarding the refund 60 days after sending the notice, the landlord may withdraw the remaining amount to be refunded from the account where it is held and keep the same without any further liabilities.
No valid mailing address: Should the tenant leave without leaving the forwarding address, the landlord is only required to send the notice about the refund to the tenant’s last know address, or the last reasonable determinable address. This means that the landlord must exert reasonable effort to at least try to find out the tenant’s new address. This also means that the 60-day period starts when the landlord sends the notice to the last known or “knowable” address, regardless of whether or not this is the correct address.
Security Deposits and Tax Filing in Tennessee
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 2019 but was only forfeited in 2020, then the landlord should only include it as income in 2020.
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 3 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 Tennessee
Receipt Requirement: A landlord or property manager is not required to provide a written receipt to tenants for a security deposit.
Interest Payments: Tennessee landlords are not required to pay a tenant interest on their security deposit. However, it can be done on a voluntary basis
New Property Owners’ Responsibility: If the property rented is sold during the lease, the old landlord will only be relieved of liabilities concerning the security deposit upon doing both of the following:
- Transferring the security deposit to the new owner; and
- Providing the tenant with a written notice of the transfer of ownership and of the security deposit.