How to Hold a Renter's Deposits and Fees

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When a tenant gives you a security deposit or other fees, you can’t spend the windfall. Although some fees are income, others require a separate banking account. Your right to the money and the tenant’s right to assure it is safe, fall under different regulations in different states.

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Instructions

Difficulty: Moderate

Step1

Open a separate banking account. Known as a trust account, some states require you to put a tenant’s security deposit here and leave it, untouched, until the tenant leaves. Alternately, you can disperse it to pay damages upon the tenant’s evacuation of the property.

Step2

Notify the tenant of the location of the trust account. Although not all states require this, it is a good practice to inform your tenant where the money is held.

Step3

Pay your tenant the interest on the security deposit if it is in an interest-bearing trust account. Again, this rule varies from state to state, so check with your own governing board for the exact law in your area. If you live in an interest paying state, you must pay the interest to your tenant every year and upon their leaving.

Step4

Check your city’s law if you live in a rent-controlled area, and your state does not require you to pay interest. For example, Illinois does not require interest payments, but Chicago does. If you fail to pay interest in one of these communities, you can face stiff penalties.

Step5

Deposit nonrefundable fees into your regular checking account. If your state allows you to charge nonrefundable fees for pets or other considerations, you may spend it. However, if you do collect a nonrefundable fee, make very sure the tenant knows that he will not be getting it back. Don't identify the fee as a "deposit" in your contract or you may have to give it back.

Step6

Transfer all security deposits in your trust account to anyone who buys your property. The money must transfer upon closing of the property and the tenants must be notified where the new account is located and you must give them the account information. Contact an attorney when making a transfer of this kind, since the state laws governing it can be tricky.

Tips & Warnings

Some states allow you to use a tenant’s security deposit as you would cash as long as you have it available to return to the tenant when he vacates.
Don’t combine personal funds with tenant funds in a trust account. That is illegal.