What happens to the security deposit at the end of the lease?

State law sets forth specific laws governing the return of security deposits. The landlord is required to return the security deposit within a set period of time (for example, in some states a landlord must return the security deposit to the tenant within 21 days). In the event that less than the full amount of the security deposit is returned, the landlord must provide the tenant with a written statement regarding any deductions made from the security deposit.

There is a big difference between a security deposit and an advance payment of rent. The security deposit is held by the landlord (or held in trust in a bank account maintained by the landlord) in the event that there is any damage to the rental property that has been caused by the tenant while s/he had in use and possession. An advance payment of rent sometimes is collected at the inception of the rental agreement to assure the landlord that s/he will be paid the last month of rent before the tenant vacates the rental property. A security deposit usually may not be used toward the payment of the last month's rent. When a tenant has paid the equivalent of a month's rent as a security deposit, the tenant must pay the last month's rent to the landlord and then wait for the landlord to return the security deposit (as opposed to defaulting on the rental agreement by defaulting in the payment of the last month's rent).

Some states and local jurisdictions have laws specifying how the landlord is to hold the security deposit (such as in a separate account at a bank) and who is entitled to the interest earned on a security deposit. Both state and local laws and ordinances can be very specific on the handling of security deposits.