How to handle Security Deposits

Question

I have a question about the best place to hold a tenant’s security deposit. Should I keep it in savings? Could I earn interest on it in the short term? Are there any other options I should consider? Tax implications?

Jonathon VanNuland · Answer

Looks like you got the answers needed. Heres the Kansas specific answer, direct from the kansas legislature. I keep my security deposits in its own savings account. If you are using any ideas to get more interest on them i'd love to hear it. Thanks!

"All security deposits shall be held by the landlord for the tenant, who is a party to the agreement, in a bank, credit union or savings and loan association which is insured by an agency of the federal government. Security deposits shall not be commingled with the personal funds of the landlord. All security deposits may be held in a trust account, which may be a common trust account and which may be an interest bearing account. Any interest earned on a security deposit shall be the property of the landlord."

https://www.kslegislature.gov/li_2012/b2011_12/statute/058_000_0000_chapter/058_025_0000_article/058_025_0108_section/058_025_0108_k/#:~:text=Security%20deposits%20shall%20not%20be,the%20property%20of%20the%20landlord.

Josh Lewer · Answer

@Abby Howe Good question. You should double-check the legal rules for your state, but it’s generally best to keep it in a separate account. From an accounting perspective, if you receive cash that is not income, it’s technically a liability, since you haven’t earned that deposit unless the tenant has contractually done something that would prevent them from getting the deposit back. It can definitely feel counterintuitive when you’ve already received the cash.

Jason Malabute · Answer

A tenant’s security deposit should be kept in a separate bank account from your operating account. This makes it clear that the funds belong to the tenant until they’re applied to damages or returned, and it also helps you stay compliant with local/state laws. Keeping it separate also helps prevent accidentally spending those funds on operating expenses.

Mario Alexandrou · Answer

@Lauren Robins I have a quick question concerning the deposit.

If the tenant, on a years lease, leaves, for what ever reason, 6 or 8 months in, do you return the deposit back, or do you hold it for the period of lease.

Ryan Spath · Answer

@Abby Howe

At bare minimum these monies should be held in a separate account that is designated to "security deposits". These funds are not technically yours; you are holding them in good faith and are expected to return them to your tenant as long as nothing was damaged beyond normal wear and tear. Every state has different laws as to how these monies should be held. It is a good idea to become familiar with these laws and practice them, especially as you begin to scale your business.

Feel free to reach out if you ever need help or want to bounce ideas off me.

Abby Howe · Answer

Thanks Ryan,  I feel like I have a solid understanding from your and the other's feedback.

Vivian Yip · Answer

This is a state specific question. The general guideline is that you should have a separate account just for the deposit and do not co-mingle the funds. Your personal savings is not a good idea.

Aaron Zimmerman · Answer

Tax implications would be if you're getting enough interest from your security deposits, you may have a small amount of interest you have to pay taxes on

Abby Howe · Answer

@Lauren Robins Thanks, I'll look and see what my state requires regarding security deposits.   I appreciate your help!

Greg Scott · Answer

I would recommend any FDIC insured account.  I heard about a small management company that invested funds in Bitcoin. When Bitcoin hit a dip, they didn't have enough cash and it took down the business.

In a dispute, a judge may want to see you have properly managed the security deposit.  Some people like to have a separate bank account for holding security deposits.  If you have several properties, it becomes a lot of work if you one bank account for each tenant, so most people just switch to tracking the amounts through an accounting package but still holding all the security deposits in one separate account.

On our apartments, we have all those funds in the operating accounts and keep careful track of each resident's deposit in our accounting package.

How to handle Security Deposits

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