Understanding Security Deposit Laws by State: The Complete 2024 Landlord Guide

By PropsManager Team · Legal & Compliance · Jun 14, 2024

I'll give it to you straight: mishandling security deposits is the #1 reason landlords end up in small claims court. And the penalties aren't small. In some states, a judge can hit you with double or triple the deposit amount if you mishandle the return — we're talking $3,000 to $6,000 on what started as a $1,500 deposit.

The problem? Security deposit laws aren't federal. They're state-by-state, and sometimes even city-by-city. What's perfectly legal in Texas can get you sued in California. What flies in Georgia will land you in court in Massachusetts.

After managing properties across multiple states for years, I've seen landlords — smart, experienced ones — lose thousands because they assumed the rules in one state applied everywhere. They don't. Not even close.

This guide breaks down the critical differences you need to know, covers the most common mistakes, and gives you a practical system for staying compliant no matter where your rentals are located.

Why Security Deposit Laws Matter More Than You Think

Let's talk numbers. According to the American Apartment Owners Association, security deposit disputes account for roughly 35% of all landlord-tenant court cases. That's a staggering figure. And the average cost to a landlord who loses one of these cases? Between $2,500 and $5,000 when you factor in the judgment, court costs, and the time you spent dealing with it instead of running your business.

Here's the kicker: most of these losses are completely preventable. Landlords don't lose because they're trying to cheat tenants. They lose because they didn't know the rules. They returned the deposit on day 31 when their state gave them 30. They deducted for carpet replacement when the carpet was already eight years old. They forgot to provide an itemized statement.

Small oversights. Big consequences.

The stakes have gotten even higher in recent years. States like California, New York, and Oregon have tightened their security deposit regulations significantly, reducing maximum amounts and shortening return windows. If you haven't reviewed your state's laws in the past two years, you're probably already out of compliance on something.

Maximum Security Deposit Amounts by State

This is where it starts. Every state has its own rules about how much you can collect upfront, and getting this wrong is the fastest way to start a tenancy on the wrong legal footing.

States With Strict Limits

These states cap your security deposit at a specific amount relative to the monthly rent:

California deserves special attention here. As of July 2024, the state capped deposits at one month's rent regardless of whether the unit is furnished — a major change from the previous two-month limit for furnished units. If you're still collecting two months on a furnished apartment in San Francisco, you're breaking the law.

States With No Statutory Limit

On the other end of the spectrum, some states let you charge whatever the market will bear:

• Texas — No cap. You could technically ask for six months' rent, though good luck finding a tenant who'll agree to that.
• Ohio — No statutory maximum.
• Illinois — No state limit, but Chicago has its own strict ordinances.
• Colorado — No state limit.
• Florida — No statutory maximum.

Just because you can charge more doesn't mean you should. In my experience, anything over two months' rent scares off quality tenants. They start wondering what's wrong with the place. A deposit of one to one-and-a-half months' rent hits the sweet spot — enough to protect you, not so much it drives applicants away.

The Pet Deposit Question

Many landlords collect a separate pet deposit on top of the security deposit. But here are the traps:

• In California, pet deposits are included in the one-month cap. You can't charge a separate pet deposit on top of the security deposit.
• In Washington, non-refundable pet deposits are allowed and don't count toward the security deposit limit.
• In Oregon, you can charge a pet deposit but it counts toward the overall deposit limit.

The rules get granular fast. And remember — you can never charge a deposit or fee for service animals or emotional support animals. That's federal law under the Fair Housing Act, and it applies everywhere. For more on pet policies, check out our guide on the pros and cons of allowing pets in your rental.

Deadlines to Return Security Deposits

Miss this deadline by even one day and you could owe the entire deposit back — plus penalties. This is the area where I see landlords mess up most often.

State-by-State Return Deadlines

A few critical notes here:

The clock starts when the tenant moves out, not when the lease ends. If someone's lease runs through June 30 but they hand over keys on June 15, your deadline starts June 15. Some landlords get confused about this. Don't.

Calendar days vs. business days. Most states count calendar days, but a handful count business days. Always verify which your state uses. Getting caught assuming calendar days when your state counts business days (or vice versa) is an easy mistake.

Forwarding addresses. Several states — California, for example — require you to send the deposit to the tenant's last known address or any forwarding address they provide. If you don't have a forwarding address, send it to the rental unit itself. Document everything. You want proof you tried.

What You Can (and Can't) Deduct

This is where the rubber meets the road. The difference between "normal wear and tear" and "damage" has launched a thousand lawsuits, and honestly, it's not always clear-cut. We've covered this topic in more detail in our post on understanding wear and tear vs. property damage.

Generally Allowable Deductions

Across most states, you can deduct for:

• Unpaid rent — This is straightforward. They owe you money, you can take it from the deposit.
• Damage beyond normal wear and tear — Holes in walls, broken windows, stained or burned carpet, damaged appliances.
• Cleaning costs — But only to restore the unit to the condition it was in at move-in. You can't charge to clean a unit that was dirty when they moved in.
• Unpaid utilities — If the lease makes the tenant responsible and they left a balance.
• Early termination costs — If the lease allows and your state permits it.

What Counts as Normal Wear and Tear?

Here's a checklist that's saved me from more than a few bad deductions:

The carpet question comes up constantly. Here's the rule of thumb: most states consider carpet to have a useful life of 7-10 years. If the carpet was already five years old when the tenant moved in and they lived there three years, you can't charge them for replacement — that carpet was at end-of-life anyway. You might be able to charge a prorated amount for excessive damage, but full replacement? No judge will side with you.

The Itemized Statement Requirement

Almost every state requires you to provide an itemized list of deductions along with the remaining deposit. This isn't optional. It's not a suggestion. It is a legal requirement, and failing to provide one can mean you forfeit the right to keep any of the deposit.

A proper itemized statement includes:

1. The total deposit amount collected
2. Each specific deduction with a description
3. The cost of each deduction (actual cost, not estimates)
4. Receipts or invoices for repairs (required in some states)
5. The remaining balance being returned

Some states like California require you to include copies of receipts if the work has been completed, or a good faith estimate if it hasn't. In California, you then have 14 additional days after providing the estimate to send final receipts and any additional refund.

PropsManager generates compliant itemized deduction reports automatically, pulling from your tracked expenses and maintenance records. That alone can save you hours on every turnover.

Storing Security Deposits: Where the Money Has to Go

You can't just dump security deposits into your operating account and call it a day. Many states have strict rules about how and where you hold these funds.

States Requiring Separate Accounts

These states require you to hold security deposits in a separate, dedicated bank account:

• Connecticut — Separate account, and you must pay interest.
• Iowa — Separate account required.
• Kentucky — Separate account in a federally insured institution.
• Maryland — Separate account required.
• Massachusetts — Separate account, must pay 5% annual interest or the actual rate earned.
• New Jersey — Separate interest-bearing account; must notify tenant of bank name and address.
• New York — Separate trust account; must pay interest minus a 1% admin fee.
• Pennsylvania — Separate escrow account required after the first year.

In Massachusetts, you also have to provide the tenant with a receipt showing the bank name, account number, and the amount deposited — within 30 days of receiving the deposit. Miss that, and you may have to return the entire deposit regardless of any damages.

States Requiring Interest on Deposits

This one catches a lot of out-of-state investors off guard. If you own rentals in any of these states, you're expected to pay interest on the security deposit:

• Connecticut — Annual interest based on a set rate.
• Florida — If held in an interest-bearing account (one of three options).
• Illinois — Required for properties with 25+ units (Chicago has stricter rules for all sizes).
• Maryland — 3% annual interest, or the US Treasury rate, whichever is higher.
• Massachusetts — 5% or actual bank rate.
• Minnesota — 1% simple interest for deposits held more than 12 months.
• New Jersey — Market rate interest.
• New York — Market rate minus 1% admin fee.
• Virginia — Required for deposits held over 13 months (rate set annually).

Forgetting to pay interest is one of those violations that seems minor until a tenant's attorney adds it to a lawsuit. Then it becomes evidence of a pattern of non-compliance. Not a good look.

Common Mistakes That Lead to Lawsuits

I've seen these play out dozens of times. Don't be the next cautionary tale.

Mistake #1: No Move-In Inspection

If you don't document the condition of the unit before the tenant moves in, you have zero leverage when it's time to deduct for damages. A tenant's lawyer will argue every scratch was pre-existing, and without documentation, you can't prove otherwise.

Do a detailed walk-through with photos and video. Have the tenant sign a move-in condition report. Use timestamped photos stored in your property management software so there's no question about when they were taken.

Mistake #2: Deducting for Normal Wear and Tear

I already covered this above, but it bears repeating. Charging a tenant for a full carpet replacement when the carpet was seven years old is going to backfire. Judges see right through it.

Mistake #3: Missing the Return Deadline

Set a calendar reminder the day the tenant gives notice. Not the day they move out — the day they give notice. This gives you time to plan. Line up your contractor for a walk-through, schedule the inspection, get ahead of it. Waiting until move-out day to start thinking about the deposit return is how deadlines get missed.

Mistake #4: Failing to Provide a Forwarding Address Form

Some states require you to request a forwarding address in writing. Others simply require you to make a good faith effort to locate the tenant. Either way, include a forwarding address request in your move-out checklist. It takes 30 seconds and can save you a world of headaches. For a deeper dive on disputes, read our guide on how to handle security deposit disputes.

Mistake #5: Commingling Funds

Mixing security deposits with your operating funds is illegal in many states and creates accounting nightmares in all of them. Even in states that don't explicitly require a separate account, keeping deposits segregated is just smart business practice. If you're ever audited or taken to court, clean records are your best friend.

How PropsManager Keeps You Compliant

Look, you could track all of this with spreadsheets, calendar reminders, sticky notes, and a prayer. Plenty of landlords do. But as your portfolio grows past two or three units, the complexity multiplies fast.

PropsManager was built specifically to handle these compliance headaches:

• Automated deposit tracking — Every deposit is logged with the amount, date received, and the applicable state law requirements.
• Return deadline alerts — You get notifications well before your state's deadline, not the day of.
• Itemized deduction reports — Generate compliant, professional deduction statements that pull directly from your maintenance and expense records.
• Move-in/move-out documentation — Store timestamped photos and signed condition reports linked to each unit.
• Separate deposit accounting — Track deposits separately from operating funds with clear audit trails.

If you're managing more than a handful of units, the time savings alone are worth it. Check out our pricing page for plan details, or request a demo to see how it works with your specific portfolio.

State Law Changes to Watch in 2024

Security deposit laws aren't static. States are actively changing their rules, and the trend is clearly toward more tenant protections:

• California reduced maximum deposits to one month's rent for all units as of July 2024, regardless of furnished status.
• Colorado implemented new requirements for detailed condition statements and shortened return timelines for some situations.
• Oregon expanded the definition of normal wear and tear and increased penalties for non-compliance.
• New York continues to enforce its 2019 Housing Stability and Tenant Protection Act, which dramatically changed deposit rules statewide.

Stay on top of changes by bookmarking your state's landlord-tenant statute page and checking it at least annually. Or better yet, use a platform like PropsManager that updates its compliance tools as laws change.

Security Deposit Best Practices Checklist

Whether you own one rental or fifty, these practices will keep you out of trouble:

• Verify your state's maximum deposit amount before setting your deposit policy
• Collect the deposit before or at lease signing — never after move-in
• Store deposits in a separate, dedicated bank account
• Provide a written receipt with bank details (required in some states)
• Conduct and document a thorough move-in inspection with photos
• Have the tenant sign a move-in condition report
• Pay required interest on deposits (check your state)
• Request a forwarding address at or before move-out
• Conduct a move-out inspection (ideally with the tenant present)
• Prepare an itemized deduction statement with receipts
• Return the deposit within your state's deadline — err on the early side
• Keep records of everything for at least 3-5 years after tenancy ends

Following this checklist on every single tenancy isn't glamorous work. But it's the kind of boring, consistent process that separates landlords who build wealth from landlords who hemorrhage money in court.

Explore More PropsManager Resources

Looking for the right property management software? Check out our in-depth guides:

• Compare Property Management Software — See how PropsManager stacks up against Buildium, AppFolio, Rent Manager, and Propertyware.
• Software for Small Landlords — Built for landlords managing 1–50 units without the enterprise price tag.
• AI-Powered Property Management — Discover how automation can save you 5–10 hours per week.
• Solutions for Property Managers — Scale from 50 to 500+ units without scaling your costs.

Frequently Asked Questions

Can a landlord keep the entire security deposit?

Only if the documented damages, unpaid rent, and allowable deductions equal or exceed the deposit amount — and you've provided a proper itemized statement within the state's deadline. You can't just keep the whole thing without justification. In states like California or Massachusetts, failing to provide an itemized deduction list within the required timeframe can mean you owe back the entire deposit regardless of actual damages. Always document everything and follow your state's process to the letter.

What happens if I miss my state's deposit return deadline?

Penalties vary widely. In some states like Connecticut and Massachusetts, you may have to return the full deposit plus double or triple the amount as a penalty. Other states simply strip your right to make any deductions whatsoever. The penalty in California, for example, can be up to twice the original deposit amount if a court finds bad faith. Even in states with lighter penalties, missing the deadline signals negligence and makes it nearly impossible to win a dispute. Set reminders well in advance — 10 days before the deadline at minimum.

Do I have to pay interest on security deposits?

It depends entirely on your state and sometimes your city. States like Massachusetts, New Jersey, New York, and Maryland require interest payments. In Massachusetts, it's 5% per year or the actual bank rate, whichever is lower. Chicago requires interest on all deposits regardless of property size, while the rest of Illinois only requires it for buildings with 25 or more units. Check both your state and local ordinances — city rules often go further than state law.

Can I charge a non-refundable security deposit?

In most states, no. A "security deposit" by definition must be refundable, minus allowable deductions. However, many states do allow non-refundable fees — like a non-refundable cleaning fee or pet fee — as long as they're clearly labeled as fees and not deposits. The distinction matters. California, for instance, considers all pre-tenancy payments to be part of the security deposit regardless of what you call them. Washington, on the other hand, explicitly permits non-refundable fees if disclosed in writing.

Should I do a move-out walk-through with the tenant present?

Absolutely, and in some states it's required. California, for example, gives tenants the right to request an initial move-out inspection so they have the opportunity to fix issues before the final inspection. Even where it's not legally required, doing a joint walk-through is smart practice. It reduces disputes because the tenant sees the same damage you're seeing, in real time. Document everything with photos during the walk-through and have the tenant sign the condition report. It's much harder for someone to claim damage was pre-existing when they witnessed and acknowledged it at move-out.

Final Thoughts: Protect Your Investment With the Right Systems

Security deposit compliance isn't something you can wing. The laws are specific, the deadlines are firm, and the penalties are real. But with the right processes and the right tools, it becomes routine rather than risky.

The landlords who consistently avoid deposit disputes share a few things in common: they document obsessively, they know their state's rules cold, and they use systems that keep them on track without relying on memory.

If you're still managing deposits with spreadsheets and sticky notes, it's time to upgrade. PropsManager automates the tedious compliance work so you can focus on growing your portfolio instead of dodging lawsuits.

Get started today — your future self (and your bank account) will thank you.