Collecting a security deposit from tenants is pretty much given these days. Considering that there's never any indication of how things will turn out, it does help to have some level of protection if less than favorable events are to occur that would leave a property owner at a disadvantage.

In a perfect world, tenants would always leave the property in the same condition they left it in but when a lease agreement ends, it can go either way.

When a tenant does move out at the end of the rental agreement, it becomes time to send the person a security deposit return letter. The document is intended to detail the portion of the security deposit being retained and the reason for same.

Writing security deposit return letters is not the most difficult task in the world, but it does help to understand how you're meant to go about it.

Why a Security Deposit Refund Letter Is Needed

Now, you have an idea of what a security deposit return letter is. Apart from indicating what portion of the deposit is being retained, it's also essential to indicate what the deductions made are for. Perhaps there may be unpaid rent, damages that exceed typical wear and tear, etc.

After a security deposit refund, the tenant can dispute the amount retained, and the idea of the deposit return letter is to protect the landlord from the liability that may come with such a situation. Additionally, if the tenant is to file a security deposit insurance claim, the letter would be needed.

Considering that the condition of the property will also be covered in the document, it provides even further protection for the landlord's interests.

Writing a Letter to Refund Security Deposits

Writing a Letter to Refund Security Deposits

The next matter is that of writing security deposit return letters. The intention here is to indicate the percentage being refunded and why (if applicable).

A security deposit return can be in full, partial, or none at all. As indicated before, any deductions being made must be aptly explained. Here is what these letters will typically include:

  1. The name and contact details of the landlord
  2. The name and contact details of the tenant.
  3. The letter's date
  4. The percentage of the security deposit returned
  5. A comprehensive breakdown of all deductions that were made from the security deposit return letter, complete with an explanation of each
  6. Any supporting documentation and photos that may be relevant based on the identified deductions
  7. A copy of either the security deposit agreement or the lease agreement, which will detail what the tenant agreed to
  8. Signature of the property owner or an authorized representative

How Should a Security Deposit Return Letter Be Sent to a Tenant?

A security deposit return letter can be a point of contention, especially if the tenant is under the impression that there is some mistake. You don't want someone who is upset about the percentage of a returned security deposit to pretend as if no letter was received.

Therefore, you should always have it delivered by certified mail with a return receipt requested. If going another route, ensure that it has some kind of confirmation that proves delivery was successful.

In most cases, taking this step is enough to achieve compliance with both state laws and local laws.

What Not to Do When Writing Your Security Deposit Return Letter

If a tenant owes a landlord money to be deducted from the security deposit, writing the letter is a pretty straightforward task. Be that as it may, the margin for error is larger than you may realize. To help you stay out of common pitfalls, here are some of the mistakes you want to be wary of.

Withholding the Entire Security Deposit

Different states require different things where deposits are concerned. For example, some will require that they are stored in a separate interest-bearing account. More importantly here, some states do not allow a landlord to retain the entire deposit.

For example, imagine a case where the state only allows the deposit to be equal to the cost of monthly rent. Also, imagine that only half the deposit can be retained. Suppose a tenant is to cause damages beyond normal wear that require the whole deposit to fix.

Even so, the landlord cannot retain the whole thing in such a state. Though the tenant will be required to pay, it is up to the property owner to collect and do so independent of the security deposit.

Failure to Create an Itemized List of Deductions

Your security deposit return letter has to properly explain what the deductions being made are for. Additionally, supporting documentation is required. If you needed to buy a new bed for your furnished rental property because the tenant destroyed the one that was there, a receipt for the purchase must be included.

It's easier to avoid a contest in a small claims court by ensuring that all charges are well understood.

Returning a Security Deposit Minus Unauthorized Deductions

While some deductions are allowed, others are not. While you can certainly withhold funds for extranormal cleaning costs or abnormal wear and tear, some deductions are not allowed. If made, the tenant can take action to get the money back.

Not Returning the Deposit within the Stipulated Ti

States will impose a time frame in which the security deposit return must take place. This tends to be somewhere in the ballpark of between 14 and 60 days unless a written explanation is provided for the withholding. A tenant who hasn't received the deposit when expected can sue for the full amount.

Having No Written Policy on the Handling of Security Deposits

Though state law must be observed, landlords should ensure that the rental agreement outlines expectations surrounding the security deposit. This is a further step to ensure that there are no misunderstandings in the matter.

When Can Not Returning a Full Tenant's Security Deposit Be Justified?

When Is Withholding a Security Deposit Justified?

While your security deposit return letter will include the reasons for withholding funds partially or in totality, not all reasons are acceptable. Here are the kinds of things that a tenant can do that makes deductions acceptable:

  • Leaving with unpaid rent due
  • Leaving the property in an extremely filthy or bad condition necessitating extra repair and cleaning bills
  • Leaving unpaid utilities behind
  • Leaving possessions behind, which meant that removal was required
  • Prematurely terminating the lease

In any of these circumstances, once the security deposit return letter explains what happened and you can show the proof, then there will be no requirement to return the full deposit. Even when you're in the right, some tenants will still want to take you to small claims court, so it's best to be safe.

Sending a Financial Statement in Lieu of a Security Deposit Letter

You may decide not to write a security deposit return letter to the tenant. In this case, you can choose to send a financial statement as an alternative. It must include:

  1. Tenant's name and security deposit return address
  2. Start and end dates of the lease
  3. Security deposit amount paid
  4. Any interest accrued
  5. Itemized deduction list
  6. Total to be deducted from the security deposit
  7. Any amount due to the tenant or the landlord
  8. Landlord's address so the tenant can send any money that may be owed
  9. Copies of any bills associated with the deduction
  10. Signature of the landlord with the corresponding date.

Wrapping Things Up

A security deposit return letter or financial statement is meant to provide context on the return of a security deposit in part or not at all. It must provide adequate details on all deductions to be made.

The said deductions must be legitimate and may include unpaid rent, late fees, cleaning charges, repairs, etc.

As simple as the concept can be, it leaves room for mistakes to be made, so try to ensure that you pay attention to the pitfalls mentioned above to avoid them.

If you want access to a well-done security deposit return letter template, as well as just about any form you could need as a landlord, Doorloop has you covered here!

Want to learn to better manage security deposits? Give this resource a read!

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David is the co-founder & CMO of DoorLoop, a best-selling author, legal CLE speaker, and real estate investor. When he's not hanging with his three children, he's writing articles here!

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The information on this website is from public sources, for informational purposes only and not intended for legal or accounting advice. DoorLoop does not guarantee its accuracy and is not liable for any damages or inaccuracies.