Introduction to California’s Security Deposit Laws

Security deposits are a standard requirement for most rental housing agreements in California. Landlords collect deposits from tenants at the beginning of a lease to provide financial protection in case the tenant causes damage or fails to pay rent. 

California has laws governing security deposits that aim to protect the interests of both landlords and tenants. These laws outline the maximum amounts landlords can charge, where deposits must be held, timelines for returns, allowable deductions, and penalties for violations.

The state legislature has recently enacted several changes to modernize and strengthen security deposit regulations. These new laws taking effect between 2020-2024 limit the total amount that can be collected, require itemized statements of deductions, and increase penalties for landlords who don't follow proper procedures.

Security deposits help offset risks for landlords leasing their property, while also protecting tenants from excessive charges. When handled according to California laws, deposits can make the rental process go more smoothly and fairly for both parties. This guide will provide a comprehensive overview of California's security deposit requirements for landlords and tenants.

Security Deposit Limits in California

New Limit Effective July 1, 2024

Under Assembly Bill 12 (AB 12), passed in 2023, landlords in California cannot charge more than one month’s rent as a security deposit, effective July 1, 2024. This limit applies to all residential units—furnished or unfurnished.

Exceptions to the Rule

There is an exception for landlords who meet all of the following criteria:

• They are natural persons or operate under a limited liability corporation where all members are natural persons.
• They own no more than two residential rental properties.
• The total number of dwelling units across those properties is four or fewer.

If these conditions are met, landlords may still collect up to two months' rent as a security deposit.

Previous Law (Before July 1, 2024)

Prior to AB 12, California allowed landlords to collect up to:

• Two months' rent for unfurnished units.
• Three months' rent for furnished units. This older rule still applies for leases signed before July 1, 2024, unless renegotiated.

Furnished vs. Unfurnished Units

AB 12 eliminates distinctions between furnished and unfurnished rentals. After July 1, 2024, the limit is one month’s rent either way—simplifying the law and reducing upfront costs for renters.

Last Month’s Rent and Service Members

Even if part of the deposit is labeled “last month’s rent,” the total deposit still cannot exceed one month’s rent.

Additionally, for active-duty service members, the deposit may not exceed one month’s rent under any circumstances, and it is illegal to discriminate against them for this reason.

Collecting and Holding the Security Deposit

Landlords must follow strict rules when collecting and managing deposits:

• The maximum deposit limit must not exceed the current legal limit, which as of July 1, 2024, is one month’s rent in most cases.
• Security deposits must be collected upfront, not in installments.
• Deposits must be kept in a separate bank account and not co-mingled with the landlord’s personal funds.
• Tenants must be informed in writing of where their deposit is being held.
• If a rental property is sold, the deposit must be either returned to the tenant or transferred to the new owner with written notice to the tenant.

Violations of these rules can result in significant penalties.

Returning Security Deposits in California

California law sets specific requirements for landlords to return tenants' security deposits after a lease ends. This helps protect tenants from improper withholding of deposits while also giving landlords a chance to make any lawful deductions first.

Landlords have 21 calendar days after a tenant moves out to return the security deposit with an itemized statement explaining any deductions. For example, if a tenant moves out on July 1st, the landlord must mail the refund and statement by July 22nd. 

If any deductions were made, the landlord must provide receipts and documentation showing the reason and cost. Things like unpaid rent, damages beyond normal wear and tear, and cleaning/repair expenses can be deducted if properly itemized.

It's illegal for a landlord to make deductions for normal wear and tear or pre-existing conditions. Cosmetic issues like minor scratches or worn carpeting generally cannot be deducted from the deposit.

If the full deposit is not returned within 21 days, the landlord forfeits the right to make any deductions at all. Even if legitimate reasons existed, failing to meet the deadline requires the full deposit to be returned.

In addition, if a landlord fails to follow the proper rules for security deposit returns, the tenant can recover up to twice the full deposit amount in damages. This penalty ensures landlords take the process seriously.

By understanding the specific timeline, documentation, and penalty requirements in California, both landlords and tenants can ensure a smooth deposit return process after a lease ends. Following the law prevents deposit disputes and potential legal issues.

Allowable Deductions from Security Deposits

California landlords can legally deduct from a tenant's security deposit for:

• Damage to the unit beyond normal wear and tear
• Unpaid rent owed by the tenant  
• Cleaning or repairs needed to restore the unit to the same condition as when the tenant moved in

California law allows landlords to deduct from security deposits to cover the reasonable cost of repairing any damages caused by the tenant or the tenant's guests that exceed normal wear and tear. For example, large stains on carpeting, broken appliances, holes in walls, or damaged flooring could justify deductions if the tenant is responsible. Normal wear and tear is expected over time from normal usage, so deductions cannot be made for minor scuffs or light stains.

Unpaid rent can also be deducted from security deposits when a tenant fails to pay all rent owed under the lease. This includes any rent unpaid after move-out. The landlord can use the deposit to cover unpaid rent instead of having to pursue other methods to collect.

Lastly, California landlords can deduct reasonable charges for cleaning or repairs if the unit is left substantially dirtier than when the tenant moved in, or if repairs are needed to restore the property to the same level of cleanliness and condition. This could include charges for professional carpet cleaning, painting, or handyman services if justified.

Landlords cannot make deductions for normal cleaning or re-painting between tenants - the unit must require extra work due to the tenant's actions or negligence for deductions to be valid. And all deductions must be properly itemized and documented.

Disputing Security Deposit Deductions

If a tenant believes the landlord has made improper or excessive deductions from their security deposit, they have the right to contest it under California law. There are a few options tenants can pursue:

Send a letter disputing the deductions

The tenant can send a formal letter to the landlord explaining why they believe certain deductions were unlawful or unwarranted. This gives the landlord a chance to review the deductions and potentially refund the tenant if they agree some were invalid. The letter should be sent by certified mail with return receipt requested so there is proof it was received.

Negotiate directly with the landlord

Often disputes can be resolved through open communication between the tenant and landlord without needing to go to court. The tenant can provide evidence like photos or videos showing the unit's move-in condition to demonstrate why damages should not be taken from their deposit. Similarly, the landlord may agree to reduce or remove disputed deductions if the tenant reasonably argues their case. 

File in small claims court

If unable to reach an agreement directly, the tenant can sue the landlord in small claims court for the return of their security deposit, up to the small claims limit. The tenant will need to provide documentation like the lease, move-in and move-out inspection reports, and evidence supporting their case. If the judge agrees the landlord improperly withheld deposit funds, the court can award the tenant up to twice the amount withheld as damages.

Report landlord violations

If the landlord failed to follow the law regarding security deposits, like not providing proper notices or timelines, the tenant can file a complaint with the local housing authority or California Department of Real Estate. This may prompt an investigation and penalties against the landlord.

Disputing improper security deposit deductions takes some effort on the tenant's part, but this ensures landlords follow the law and tenants receive their full deposits back. With the right evidence and documentation, tenants stand a good chance of recovering their money, even if it requires legal action.

Move-In Inspections and Documentation

Conducting a thorough move-in inspection and documenting the rental unit's condition is one of the most important things landlords and tenants can do. Proper move-in inspection reports and photographs can prevent or resolve the majority of security deposit disputes. 

The best practice is for landlords and tenants to jointly inspect the rental unit before move-in and fill out a detailed checklist noting any existing damage, defects, or issues. Things to document include:

• Overall cleanliness of rooms, appliances, floors, windows etc.
• Existing stains, holes, scratches, burns, or damage to walls, floors, counters, carpets, doors, cabinets etc.  
• Functionality of all fixtures, appliances, systems - test lights, plumbing, HVAC, smoke detectors etc.
• Any noticeable wear, defects, or damage inside and outside the unit.
• Yard, landscaping, fencing condition if applicable.  

Photographing the condition of the entire unit is highly recommended. Take pictures of any flaws or issues discovered during the inspection. Make sure to date and time stamp the photos. 

Once the inspection is complete, both parties should sign the report agreeing it accurately reflects the unit's move-in condition. The landlord should provide the tenant with a copy of the signed report and photographs.

Maintaining proper documentation like this makes handling security deposits easy. The landlord can deduct for any new damages not noted on the original report. Tenants can easily dispute any unfair charges for pre-existing issues. Move-in inspection reports create clarity upfront and prevent disagreements when the tenancy ends.

Accommodating Tenants with Disabilities

California has robust laws to ensure tenants with disabilities can fully access and enjoy rental housing. Landlords have certain obligations related to assistance animals, unit modifications, and overall access.

Assistance Animals  

The federal Fair Housing Act and California's Fair Employment and Housing Act require landlords to make reasonable accommodations for tenants with disabilities. This includes allowing validated assistance animals even if the landlord has a no-pets policy. Landlords can ask for verification of the tenant's disability-related need for the animal from a doctor or other medical provider. They cannot charge pet deposits or fees for assistance animals.

Unit Modifications

Landlords must permit reasonable modifications to the rental unit or common areas if needed by a tenant with a disability. For example, installing grab bars in bathrooms, replacing doorknobs with lever handles, or creating wheelchair ramp access. Tenants are responsible for paying for the modifications. Landlords can require tenants to restore the unit to its original condition at move-out in certain cases.

Ensuring Housing Access  

In addition to accommodations for disabilities, landlords have a duty to ensure their rental policies and procedures do not discriminate against tenants with disabilities. This includes being flexible with application requirements, properly maintaining accessible features, and communicating with disabled tenants in accessible formats. Landlords should ensure they comply with all federal, state and local fair housing laws.

Tax Reporting of Security Deposits

Landlords in California may have to report security deposits as taxable income in certain situations. If a tenant's security deposit is forfeited or applied to rent, the IRS considers it income to the landlord.

Specifically, if a tenant vacates the rental unit and the landlord retains all or part of the security deposit to cover unpaid rent, damages, or cleaning fees, that amount must be reported as income. The landlord must issue an IRS Form 1099-MISC to the tenant by January 31 for the previous tax year if the total amount retained from the security deposit is $600 or more. 

For example, if a tenant moved out in November 2022 and the landlord kept $650 of the security deposit for repairs and unpaid rent, the landlord must send the tenant a 1099-MISC by January 31, 2023 reporting the $650 as income for tax year 2022. The landlord must also report that income when filing their own taxes.

If the security deposit is simply rolled over to the next year with the same tenant, it does not need to be reported as income. The tax reporting requirements only apply when deposits are actually retained by the landlord, not just held over time.

Proper tax reporting protects landlords from penalties and audits. Keeping detailed records of all security deposit accounting can make tax reporting straightforward. Issuing 1099-MISC forms to tenants also ensures they can accurately report rental expenses and income on their own tax returns.

Key Takeaways

Following California's security deposit laws and best practices can help ensure a smooth process for both landlords and tenants. Here are some key takeaways:

• Landlords should clearly communicate deposit requirements and limits before a tenant signs a lease. Collecting more than the legal limit can lead to penalties.
• Conduct a detailed move-in inspection with the tenant, noting any existing damages in writing and with photographs. Provide the tenant with a copy.
• Hold the deposit in a separate bank account and don't spend it. Follow rules on deposit transfers when selling a property. 
• Tenants should thoroughly clean and repair damages beyond normal wear and tear before moving out. 
• Landlords must send deposit refunds or itemized deductions within 21 days after a tenant moves out. Late penalties can apply.
• Tenants can dispute improper deductions in writing within 21 days and sue in small claims court if needed. Keep documentation.
• Consider compromising on disputed deductions to avoid court. Document everything in writing.
• If disabilities require modifications or support animals, follow fair housing laws for deposits. 
• Report interest earned on deposits annually on tax forms. Tenants may owe taxes on large refunds.
• Act professionally, communicate politely, follow rental agreements, document everything, and know the laws. Doing so will help prevent most deposit disputes.

Frequently Asked Questions

What is the law on security deposits in California?

In California, the law limits security deposits to two months' rent for unfurnished units and three months' rent for furnished units. Landlords must return the security deposit, less any lawful deductions, within 21 days after the tenant moves out.

What happens if a landlord does not return the security deposit within 21 days in California?

If a landlord in California fails to return the security deposit within 21 days, they lose the right to keep any of it and may also be subject to a penalty of twice the amount of the security deposit for acting in bad faith.

What is the new deposit law in California?

As of my last update, there hasn't been a recent statewide change specific to security deposits beyond the existing regulations. Any new proposals or changes would typically be detailed on state or legal resources online.

What is the holding deposit law in California?

In California, a holding deposit is money paid to a landlord to hold a rental unit for a prospective tenant for a specified period. The amount should be applied to the first month's rent or returned if the tenancy proceeds, but it may be forfeited if the tenant decides not to move in after agreeing to do so, depending on the terms agreed upon when the deposit is paid.

Can a landlord deduct painting from a security deposit in California?

In California, a landlord can deduct from the security deposit for painting necessary to remedy damages beyond normal wear and tear caused by the tenant. If painting is needed due to normal wear and tear, the cost should not be deducted from the security deposit.

What is the new renters law in California 2024?

As of the latest information available, specific details about new renters' laws set for 2024 would need to be checked through recent legislative updates or state government resources. Typically, changes focus on tenant protections, rent control adjustments, and eviction procedures.