Keeping track of security deposits tenants gave you months—or years ago—can get complicated, especially if you have more than one property or multiple tenants.
Make things easier by setting up separate bank accounts just for security deposits. Not only is it a great way to stay organized—in most states, it’s required by law.
What’s a security deposit?
Landlords have been accepting security or damage deposits from tenants to insure against potential property damages for ages. Centuries ago, a tenant could put down a deposit with a promissory note against crops, livestock, or even children. (Imagine that!)
Now, landlords require tenants to provide money up front—usually one or two months’ worth of rent—which they hold until the end of the lease and return if there aren’t any damages.
The problem: Commingling of funds
Technically, security deposit money does not belong to the landlord. It’s on loan while the tenant lives in the rental property. The landlord must keep the deposit safe until it’s time to offset damages or return the money to the tenant.
When a landlord keeps the deposit in the same account as their personal funds or other deposits from tenants, three common issues arise:
Problem #1: Lack of tracking
The deposit becomes difficult to track and validate in a court of law. In many states, commingling of funds can forfeit a landlord’s right to claim any of the deposit.
Problem #2: Accidental spending
The deposit might accidentally get spent on car repairs, a haircut for your fluffy toy poodle, Louis Vuitton.
Problem #3: Interest accrual
Since the security deposit doesn’t belong to the landlord, many states require that a landlord collect interest on behalf of the tenant. This becomes nearly impossible to calculate if the deposit is commingled with personal funds.
Some states, such as Pennsylvania, allow the landlord to keep part of the interest as an administrative fee, but others require that the landlord give every penny of interest earned on the deposit back to the tenant.
The solution: tenant security deposit account
Most independent landlords don’t realize the importance of this basic accounting technique.
I have a bank account for each property, and I use these accounts only to hold money that does not belong to me, such as deposits. Here’s why:
Bank accounts you need
There are a dozen ways to organize your bank accounts. Because I manage my own properties (and only my own), the method that worked for me is to have one rental operating account for all my properties and a separate account for each property’s current security deposit(s).
I’m not an accountant or a lawyer, but this method satisfies most of the state laws I’ve seen.
For example, if you own three rental properties, you might have the following bank accounts:
- Personal checking: Date nights, personal mortgage, kids’ shoes, and haircuts for Louis
- Personal savings: Emergency fund for your family, vacation savings, orthodontia for the kids, etc.
- Rental operating checking: Repairs, maintenance, and mortgage expenses for ALL of your rentals. You can track each property’s expenses in a separate ledger.
- Security deposit checking account #1: The only money in this account is the security deposit for property #1.
- Security deposit checking account #2: The only money in this account is the security deposit for property #2.
- Security deposit checking account #3: The only money in this account is the security deposit for property #3.
By keeping the security deposits in their own checking accounts, you can issue deposit refunds directly from the appropriate account by writing a check, which keeps your books nice and clean.
I wouldn’t recommend keeping the deposits in savings accounts, because you’d be forced to transfer money to and from a checking account in order to issue refunds via check. This defeats the purpose of keeping the money separate.
Security deposit accounts laws
Here are a few examples of how state laws tackle how landlords should hold tenant security deposits.
Florida specifically prohibits landlords from commingling funds.
2013 Florida Statute § 83.49 (1a) Whenever money is deposited or advanced by a tenant on a rental agreement as security for performance of the rental agreement or as advance rent for other than the next immediate rental period, the landlord or the landlord’s agent shall hold the total amount of such money in a separate non-interest-bearing account in a Florida banking institution for the benefit of the tenant or tenants. The landlord shall not commingle such moneys with any other funds of the landlord or hypothecate, pledge, or in any other way make use of such moneys until such moneys are actually due the landlord.
In Kentucky, the landlord loses the right to withhold ANY money from the deposit if they don’t store it in a separate account.
Kentucky Revised Statutes § 383.580(4) No landlord shall be entitled to retain any portion of a security deposit if the security deposit was not deposited in a separate account.
Pennsylvania dishes out interest to renters after the second year of tenancy is complete—but also gives landlords a piece of the pie.
68 Pennsylvania Cons. Stat. Ann. §§ 250.511b(b) The tenant is entitled to interest after the second anniversary of giving a deposit. The landlord shall be entitled to receive as administrative expenses, a sum equivalent to one percent per annum upon the security money so deposited, paid to the tenant annually upon the anniversary date (3rd year) of the commencement of his lease.
In Washington, the landlord gets to keep the interest, but it’s still a good idea to keep the funds separate.
Washington RCW §§ 59.18.270 Unless otherwise agreed in writing, the landlord shall be entitled to receipt of interest paid on such trust account deposits.
Separating out security deposits not only helps you stay organized and avoid unpleasant financial surprises—it may also be required by law. Use individual savings accounts to hold your renters’ deposits until it’s time to return their money on move-out day.