It’s easy to make a mistake with security deposits, especially as a landlord in California.
Security deposit errors are common, especially for landlords who do not have the benefit of a professional property management partner. The problem is, these mistakes are often expensive to fix. Landlords may find themselves in court, being ordered to pay penalties that far exceed the amount of the original deposit. Property owners get into trouble when they make deductions that are illegal or they wait too long to return the deposit.
Recently, security deposit laws have changed in a pretty major way. There are new limits to how much a landlord is permitted to collect in a security deposit.
Let’s talk about security deposit law in California, specifically how much can be collected and what deductions are allowed from that deposit.
How Much of a Security Deposit Can a California Landlord Collect?
Effective July 1, 2024, the security deposit limit for rental properties in California became the equivalent of one month’s rental amount. This applies to rental properties that are furnished as well as those that are unfurnished. The new law is a result of AB 12, and it’s a big change in California security deposit law. It’s much different than what we’ve been doing for so many years.
Previously, the law of the land in California has been pretty consistent around security deposit limits. For an unfurnished rental unit, the maximum security deposit amount had been the equivalent of two months’ rent. For a furnished rental property, the maximum security deposit amount had been the equivalent of three months’ rent.
There are exemptions to the new security deposit limits, however. If a property owner can be considered a “small” landlord, meaning they own up to two rental properties and four rental units or fewer, they are exempt. Two duplexes? Exempt. One single-family home and a triplex? The new security deposit limits do not include those properties.
That sounds like a bit of relief; when a landlord falls into one of these categories, they can continue to charge up to twice the monthly rent. But it’s important to consider whether this makes sense. There’s a new sort of competition on the market, now. Most of the other landlords across the state will be beholden to the new limits. It’s possible that tenants will not be willing to pay a security deposit that’s higher.
There may be a good reason to charge a little bit more, when it’s possible and permissible. Maybe there is a tenant moving in with a 100-pound dog, and this risk could potentially invite additional deterioration to the property, and a bit of extra protection is needed.
To qualify for this exception, the rental property owner must hold the property as a natural person, a limited liability company (in which all members are natural persons), or as a family trust. It will not apply to corporations. Oh, and there’s an exception to the exception: if the property is being rented to a military tenant, the landlord cannot claim an exemption to the security deposit amount. In this case, the landlord can only charge the one-month equivalent.
There’s a lot of nuances around exceptions. Be careful to follow the law. Talk to a local property management expert or consult with an attorney.
It’s not necessary to return any security deposits that were collected years ago that might exceed this new limit. AB 12 requirements apply only to new security deposits collected after July 1, 2024.
Collecting Move-In Funds that Are Not Rent
Another part of AB 12 clarifies the question a lot of landlords have around pet deposits vs. security deposits.
Pet deposits are considered part of the overall security deposit. A landlord has to include the pet deposit with the security deposit, and both of them together cannot be more than the one-month limit. Rental housing providers can no longer demand additional deposits specifically for pets beyond this limit.
It’s also important to think about the move-in funds that are collected. It’s not possible to collect the first month’s rent, a security deposit that’s the equivalent of a month’s rent, and then last month’s rent, too. This was pretty normal for a while, but it’s not allowed now.
Under AB 12, rental property owners can charge the first month’s rent in advance of a tenant moving in, because this is a pretty standard practice and what we’d advise landlords to do anyway. Always collect certified funds so there’s no risk that the tenants are moving in while their check bounces.
However, while rental property owners can and should collect both the security deposit and the first month’s rent up front, they cannot charge the “last month’s” rent separately and hold it apart from the security deposit until the end of the lease, when the tenant has given their notice to vacate.
If a landlord does collect the last month’s rent, that would be considered part of the security deposit and subject to the one-month limit. We don’t advise this. Collect the security deposit. Collect the first month’s rent. Leave it at that.
Does the new security deposit limit have an immediate impact on a landlord and their profitability?
We don’t believe that it does. As long as rental property owners are taking care to screen tenants carefully and maintain strong relationships with existing residents throughout the tenancy, we can’t see how this puts a landlord or their earnings at risk. One month’s rent for a security deposit should be enough to protect an owner and their rental property. If there are any questions, contact us and we can talk about any specific circumstances that may be a cause for concern.
What Can Landlords Deduct from a Security Deposit?
Documenting all deductions from a security deposit is critical. If a landlord is going to charge the security deposit for a hole in the wall that they had to patch or for hauling services because the departing tenants left behind a lot of furniture and trash, it’s important to include a receipt for the cost of that work. When only part of the deposit is returned or none of the deposit is returned because the expenses exceeded what was collected, it’s important to include an itemized list of what was kept and why.
Here are the only reasons that a landlord should keep or make deductions from a security deposit:
- Unpaid Rent or Utilities
When tenants leave the property owing back rent, a landlord can use the security deposit to bring their account current. Again, make sure that it’s easy to document what is owed, and only keep what is owed.
In some cases, a tenant will not pay the last month’s rent because they know they’re leaving. Or, they might have paid only half a month’s rent towards the end of their tenancy. It could be that a property owner is trying to turn the utilities back on in their own name, but there’s an overdue balance on the electricity account. Whatever the situation, landlords can keep money owed from the deposit.
- Tenant Damage
When a tenant moves out and leaves damage behind, landlords can use their security deposit to pay for that damage. Just make sure it’s actually damage, and not normal wear and tear. There isn’t a formal definition of normal wear and tear, but we consider those small nail holes from where pictures were hung to be wear and tear. Scuff marks on floors and walls are wear and tear. The tenant damage that landlords will use the security deposit to pay for is more severe, more costly, and hopefully well-documented. Those move-in and move-out condition reports will help to prove it.
- Cleaning Fees
We always expect our tenants to leave the rental property in a clean and tidy condition. In our lease agreements, we write that we expect the get the property back in a condition that’s as clean as it was when we turned that home over to them. When we have to have our rental properties professionally cleaned after a tenant moves out, we charge the security deposit.
There are other things to know about California security deposits and tenant protections.
For example, a landlord has 21 days to return the deposit and/or an itemized list of deductions. Don’t miss this timeline.
Also, it’s important to remember that security deposits are always refundable.
A landlord cannot put something in the lease agreement about the deposit not being refundable. Owners are legally required to return that deposit at the end of the tenancy, minus any amounts that are lawfully kept.
As you can see, keeping up with security deposit laws in California can be a full-time job. It’s important to be working with a professional property manager who can ensure you’re compliant and who is keeping up with local and state laws.
That’s us.
If you have any questions about what we have talked about, or you’d like to talk more about the value of professional management, please contact us at New Bridge Management. We serve Modesto, Turlock, Merced, Stockton, and the surrounding Stanislaus, Merced, and San Joaquin Counties.
