How Security Deposits are Held
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State laws and local ordinances determine how security deposits are to be held. You should check your state laws and local ordinances to find what laws apply to you. For example, the state of California does not require interest to be paid on deposits, but the cities of Berkeley and San Francisco do. So if you’re a landlord with rental property in the city of San Francisco, you will have to pay interest on deposits.
During the time the tenant lives in the rented unit, the deposit belongs to the tenant and cannot be used to satisfy the landlord’s debts or creditors. State laws and local ordinances sometimes specifically state how these deposits must be held. Deposits may have to be held in separate accounts or interest-bearing accounts paying a specified interest rate. There may be different requirements if a landlord has several rental units. The interest on such accounts may have to be paid to the tenant at a specified time or the landlord might be permitted to retain an administrative fee. In some states there are no limitations and landlords commingle the tenants’ security deposits with their own funds and are only responsible to return the money when the tenant leaves. Both landlords and tenants should check their local laws to find out what is required.
Tenants who rent rooms to roommates may be in the position of the landlord and required to pay interest on security deposits to their subtenants.
Interest income is taxable, and you should consult a tax advisor to determine whether the liability belongs to the landlord or the tenant.
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