The importance of understanding Connecticut landlord-tenant laws and rights cannot be overstated. One of the most fundamental pieces of that puzzle is the security deposit regulations of the state.
These are governed under the CT Gen. Stat. § 47a-21. In reading through, you'll find a set of regulations that every Connecticut landlord and their property managers will need to abide by in the state. The intention is, of course, to protect all parties that form a part of the rental agreement.
It also brings clarity to several misconceptions. For example, while a landlord will hold a security interest, the security deposit remains the tenant's property. This doesn't change unless a portion or all of it has been forfeited for one reason or another.
This is why you're here to learn all the nuances of security deposits. This will include how much you can charge, how to deal with breaches, penalties for not returning them when expected, as well as other crucial details.
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Now, let’s dive in.
According to Connecticut security deposit laws, a landlord cannot charge any more than two months' rent as a security deposit if the tenant is below 62 years of age. If the tenant should be 62 years of age or older, then the limit becomes one month's rent.
In cases where a payment that exceeds one month's rent was required because the tenant was less than 62 years old, a refund of the excess amount must be made available on request.
Beyond the maximum security deposit payment of up to two months' rent, a Connecticut landlord may also elect to request a pet deposit. However, this can only be applied to those who do not require a service animal.
If the tenant is a disabled person who does require a service animal, then the landlord cannot require this additional payment. This is because the Federal Fair Housing Act mandates that any housing facilities being provided allow an equal home enjoyment opportunity to those who have service or emotional support animals.
A landlord in Connecticut needs to follow specific directives where holding a tenant's security deposit is concerned. It must be placed into at least one escrow account in a financial institution.
There should be no withdrawals from the said escrow account under Connecticut security deposit laws. However, there are a few exceptions to this rule, which are as follows:
- When landlords pay tenants interest on security deposits based on what may have accrued on the account
- Return rental security deposits in full or part to the tenant
- Paying any costs that may be chargeable to the security deposit
- Transferring the security deposit to another escrow account
- Transferring the security deposit to the rental property's new owner where applicable
- Taking any security deposit interest that the tenant has no entitlement to.
Note that under Connecticut law, a landlord must provide tenants with a written notice that contains all the details of the escrow account. The said notice should be provided within 30 days of the receipt of the security deposit or 30 days after transferring it to another financial institution.
The details in the notice should include both the name and address of whichever financial institution is holding the security deposit.
If there should be another party who assumes the landlord's interest in the property, then that party is required to provide written notice within the same 30-day timeframe.
Should the property be sold while the lease is active, the landlord must then withdraw the security deposit and ensure it is delivered to the home's buyer. The new owner is then required to comply with the security deposit holding rules just as the initial landlord would have been required to do.
Any failure to uphold these rules on security deposits could attract a fine of no more than $500 or imprisonment of up to 30 days per instance of noncompliance.
In Connecticut, a landlord is allowed to deduct the cost of any damages or injury suffered from security deposits where the tenant is at fault. Such deductions include:
- Any unpaid rent
- Any outstanding utility payments
- The costs associated with damages incurred from the tenant's failure to meet whatever tenant obligations have been established.
- Payments for property damage that exceeds normal wear and tear (covered later)
In essence, before a landlord can use a security deposit to cover damages suffered, there must be two conditions met:
- Normal wear and tear must not be at play
- Based on Connecticut statutes, the tenant must have failed to comply
Additionally, a security deposit cannot be used to cover the last month's rent unless the rental agreement or other written agreement between the parties allows it.
Normal Wear & Tear
Normal wear and tear is the kind of deterioration that is expected from living in a space provided there is no accident, misuse, carelessness, negligence, or abuse of the property or its contents on the part of a tenant.
For example, if the home was painted just before the rental agreement was signed and the first month's rent was collected, it's reasonable that within a two-year timeframe, the paint would become faded as this is a natural occurrence.
Damage, on the other hand, refers to occurrences that are beyond reasonable expectation as these elements of destruction are the result of negligence. The result is usually a negative impact on the value, normal function, and usefulness of the property.
An example of this would be a window that may have been broken because a child was playing with a ball near it.
While security deposits provide a layer of insurance to landlords, they can only be used when the tenant has demonstrated a failure to comply with certain obligations. A tenant is expected to:
- Ensure that all facilities and appliances are reasonably used.
- Keep the premises and all its fixtures both clean and safe.
- Have garbage disposed of cleanly and safely.
- Demonstrate compliance with any regulations on health and safety that may come from housing, building, or fire codes.
Tenants should never disturb neighbors' peaceful enjoyment of the premises unreasonably nor should they ever destroy, remove, or damage the premises or its parts.
Should a tenant's failure to comply with any of the above cause damages, then the landlord can use the security deposit to cover the associated charges.
Security deposits in Connecticut are expected to be returned per established regulations. Note the following:
- Provided that the tenant has surrendered the property and returned the keys, the landlord will have 30 days to return the security deposit or what may be left after deductions. Alternatively, once a written notification of the tenant's forwarding address has been received, the landlord has 15 days. Whichever period comes later will be applicable.
- If a landlord does not return the security deposit on time or fails to provide an itemized list of deductions, there may be a liability for twice the amount paid by the tenant. Additionally, a fine of up to $250 may be applicable for each offense where the landlord decided to withdraw funds where it was not allowed.
- Landlords are required to pay tenants interest on security deposits where applicable. In addition to the security deposit and itemized list of deductions, if a landlord should fail to pay tenants interest on time, there will be a liability for $10 or twice the amount of the interest. The greater of the two will apply.
There is no single way in which tax requirements are treated for all rental agreements in Connecticut. This will depend on if the landlord will be keeping all or any part of the deposit.
When security deposits are received, they are not automatically seen as income. The IRS does not recommend declaring them as income when the possibility exists that they may need to be returned.
Once the landlord no longer has an obligation to return it, then it will become taxable. Imagine a situation where a property costs $500 to rent. If the security deposit is one month's rent ($500) and the property is rented in 2021, the landlord will only need to declare rent collected in 2021 as income.
If the tenant should leave in 2023 and the deposit is forfeited, only then should it be declared.
To make things a bit more straightforward, the IRS has provided three rules that may be used to properly ascertain when security deposits should be reported as income:
- If there is unpaid rent or a breach that has resulted in forfeiture of the deposit, the amount kept should be reported as income in the year of the said forfeiture.
- If the security deposit was used to cover chargeable expenses, there is no need to report it as income unless the expenses were also included.
- If both parties had agreed that the deposit could be used to cover the final month's rent, then the landlord is to declare it as income upon receipt.
There is one final set of security deposit regulations you may want to bear in mind as a Connecticut landlord:
- If there should be any interest on security deposits, landlords are either to pay the security interest to the tenant or credit it toward the rent if that option is provided.
- The Banking Commissioner will determine the interest rate annually. The said interest rate should equal the average rate insured commercial banks pay on savings deposits, which the Federal Reserve Board Bulletin publishes. The figure should be rounded to the nearest 0.1%
- Security deposit interest payments are to be paid on the lease's anniversary date annually. At this point, it can either be paid or credited to the next month's rent. Should a landlord knowingly fail to make this payment, a fine of up to $100 may be applicable for each offense.
- Once a tenancy is terminated, the tenant must provide a forwarding address to the landlord to which the security deposit is to be mailed or paid. The landlord should also submit a written notice of deductions to the tenant's forwarding address.
- If a rental property is sold while a tenancy is active, the buyer must provide a security deposit refund when the lease ends. This means that the buyer has the responsibility of getting the deposit and making the required accounting considerations for same.
The Bottom Line
There's undoubtedly a lot to consider as a Connecticut landlord where security deposits are concerned. For example, there's the determination of the Banking Commissioner of an annual interest rate that will be paid or applied to the next month's rent.
You also need to understand the difference between damage and typical wear and tear, as well as where to keep rent security deposits and when withdrawals may be made from there.
Thankfully, you have all the details provided above as a very comprehensive guide to it all.
Is Every Initial Advance Rental Payment a Security Deposit?
Not necessarily. An advance rental payment can initially be made for the first month's rent or for a key or any special equipment that may be synonymous with the rental property. Once it falls outside the scope of these areas, then it would be considered a security deposit.
How Does Taxation Work Under Connecticut Security Deposit Laws?
Put simply, security deposits in Connecticut do not become taxable until the time they become a landlord's property. Once applied to charges, unpaid rent, or otherwise forfeited, the deposit is considered income.
Does Connecticut Allow Landlords to Charge a Cleaning Fee?
Costs for a cleaning fee being charged to the deposit must be based on the stipulation of the rental agreement. However, if there is a requirement for cleaning to return the property to the state it was in when the tenant moved in, then an exception may be made.
Can a Landlord Decide Whether a Security Deposit Can Be Used to Cover the Last Month's Rent in Connecticut?
This would need to have been established in the rental agreement or otherwise in a written agreement first.
What Happens if a Landlord Fails to Return the Security Deposit in Connecticut?
The landlord could then lose the right to make deductions and face a fine of double the security deposit.