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Arizona is one of the most landlord-friendly states in the USA. Even so, it doesn't mean that being on the ownership side of a lease or rental agreement is a cakewalk. As the owner of a rental property, there is a requirement to understand all the nuances that come with a lease agreement.

Security deposit deductions, returns, and more are examples of principles that must be mastered to near perfection. The appropriate regulations can all be found in AZ Rev Stat § 33-1321.

While it's important to be compliant with all the applicable provisions to your lease agreement, it should be done for more than just staying out of trouble. A part of the reason the Arizona security deposit laws were put into place is the protection of the safety of all parties involved in the rental property agreement.

Below is a high-level look at everything you need to know about security deposits as an Arizona landlord.

Maximum Deposit

There is a security deposit limit of one and a half month's rent in Arizona. However, for mobile home spaces, Arizona landlords are allowed to charge up to two months' rent. Note that this will include any compulsory advance rent payments.

Depending on the situation, Arizona's security deposit laws allow the landlord to require an additional pet deposit. However, this requirement cannot be applied to those who have emotional support or service animals.

Such parties are protected under the Federal Fair Housing Act, which mandates that disabled persons have equal access to and enjoyment of rental properties.

Nevertheless, if the service animal should cause any damage to the property, then the tenant is liable to cover it.

Allowable Deductions

Security deposit laws in Arizona allow a landlord to deduct charges from the deposit during the term of the lease agreement so long as the reason is allowed. Once the lease has ended, the landlord can use the security deposit to cover any of the following:

  1. Unpaid rent
  2. Established charges covered in the lease agreement
  3. Nonrefundable fees or deposits, which would need to have been stated as "nonrefundable" in the initial agreement
  4. Any costs associated with damages caused by the tenant's failure to remain in compliance with property maintenance obligations

Note, however, that two things must be true before security deposit deductions may be made by the landlord:

  1. Normal wear and tear must not be at play
  2. The tenant must definitively have failed to maintain the premises as obligated

The last month's payment for the rental unit can be covered by a tenant's security deposit so long as there is a written agreement between both parties agreeing to it.

Arizona's security deposit laws allow landlords to charge other items to security deposits too so long as the required provisions are made in the lease agreement.

Normal Wear and Tear

Normal wear and tear come from using a property as intended. For example, over time you will find that the paint on the wall becomes faded. This is to be expected, even in a well-maintained property.

These kinds of deterioration are not directly caused by any accidents, property misuse, abuse, or carelessness.

Damages, on the other hand, sit on the other side of the fence. In this case, the destruction occurs because of negligence, carelessness, or abuse on the part of the tenant. A garage door being hit by the tenant's car is a good example of this.

These kinds of issues will usually hurt the overall function, value, and usefulness of the property.

Tenant Obligations

While a landlord is allowed to charge the cost of repairs to the security deposit in Arizona, this can only apply if the items being covered are the direct result of a failure on the part of the tenant to comply with the established obligations that fall under the maintenance of the premises.

The regulations here require the tenant to:

  • Maintain the premises cleanly and safely, including its plumbing fixtures
  • Meet all health and safety requirements that fall under the relevant building codes
  • Promptly notify the landlord in writing whenever maintenance or repairs are required
  • Use all the facilities provided with the property reasonably
  • Safely and cleanly dispose of all garbage and waste

Additionally, the tenant must not unreasonably disturb the peaceful enjoyment of the property by neighbors and should not remove, destroy, or damage parts of the premises.

The tenant's security deposit may be used to cover repairs under Arizona landlord-tenant laws provided that the said tenant fails to comply with any of the stipulations highlighted above.

Additionally, the security deposit may be forfeited if the tenant has unpaid rent for at least 10 days and has abandoned the property with no notice to the landlord for seven days. In such a situation, the landlord must, via certified mail, communicate the notice of abandonment and post a notice on the rental property's door.

With no acknowledgment of the notice within five days, the landlord can legally take both the property and the security deposit.

Returning Deposits

The return of a tenant's security deposit in Arizona must be handled in a very specific way, based on the information below:

  • The security deposit, or its remnants, must be returned within 14 days of the date the signed lease agreement is terminated, the property has been handed over to the landlord (via returning of keys of vacating the premises), and the tenant has requested the deposit's return (A tenant can request to be present during the move-out inspection).
  • First-class mail should be used to return the security deposit as well as to provide an itemized list of deductions.
  • If the tenant wishes to dispute the deductions made from the security deposit, this must be communicated within 60 days, or acceptance is considered to have taken place.
  • When a landlord fails to return the security deposit within the stipulated 14-day period, a tenant can recover both the wrongfully withheld amount, as well as a penalty of twice the amount.

Tax Filing

Handling the security deposit for tax purposes depends on the extent to which the Arizona landlord keeps the deposit in full or part.

Only when a landlord no longer must return the security deposit is it considered taxable income. In such cases, it is to be declared during the period in which the obligation for return was removed.

The IRS provides three rules to help understand when security deposit reporting as income applies:

  1. Once there is a lease breach or the security deposit was used to cover unpaid rent, the amount kept must be declared in the year of forfeiture.
  2. If both parties have agreed that the security deposit can be used as the last payment of monthly rent, it should be declared immediately upon collection.
  3. When a security deposit is used to cover chargeable expenses, it does not need to be included unless the repair costs are declared as expenses.

Other Rules

Pay attention to this last set of rules for handling a renter's security deposit:

  1. There is no requirement for landlords in Arizona to provide a receipt for deposits.
  2. Landlords do not need to hold deposits in separate accounts.
  3. Only mobile home spaces require interest on the security deposit to be paid to the tenant. The minimum interest annually will be 5%.
  4. If the property is sold while the lease is active, the buyer assumes all responsibilities that the seller had where the deposit is concerned. This means that the said buyer should ensure to get the deposit from the seller and put in the right accounting practices.

Conclusion

Whether it's handling refundable security deposits correctly, identifying damages and covering them, taxation, etc., knowing how to treat this element of landlord-tenant laws is a must. Thankfully everything you need is above.

FAQs

How Is Taxation on Security Deposits Handled in Arizona?

The security deposit only becomes taxable when a landlord no longer must return it to the tenant.

Is There a Rule Against Using a Security Deposit to Cover the Last Month's Rent in Arizona?

This is allowed so long as a provision for it was made in the lease agreement or otherwise in writing.

Do Arizona Laws Allow Landlords to Charge a Cleaning Fee?

No. However, the landlord may do so if there is a provision in the lease agreement.

How Is Normal Wear and Tear Classified?

This speaks to any damages beyond expectations from normal use. Negligence, abuse, and carelessness, alongside similar factors, would be at play.

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Resources

  1. https://www.doorloop.com/laws/arizona-landlord-tenant-rights
  2. https://www.findlaw.com/state/arizona-law/arizona-security-deposit-laws-.html
  3. https://law.justia.com/codes/arizona/2021/title-33/section-33-1321/
David Bitton

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!