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It's common for a landlord to feel intimidated by the amount of information about security deposits, which can cause misunderstandings and legal problems. In New York, NY, Gen Oblig L 7-103 governs the acquisition and reimbursement of security deposits. To ensure the safety of those involved, these regulations set forth a set of guidelines that property managers and landlords in the state must follow.

In this article, we'll provide all the information you need pertaining to security deposits to ensure that you are always compliant with state law.

Maximum Deposits

The Housing Stability and Tenant Protection Act of 2019 states that landlords in New York are only permitted to request a security deposit equal to a month's rent. Keep in mind that the maximum security deposit amount applies exclusively to residential properties that are not rent-stabilized.

Exceptions

Security deposits are capped at one month's rent in New York, except in the following cases:

  • Communities for seniors with ongoing care.
  • Senior housing developments.
  • Adult care centers.
  • Assisted living providers.
  • Units that are covered by either the emergency housing rent control statute or the city rental and rehabilitation code.
  • Independent retirement homes that are not for profit.

Pet Deposits

The landlord is allowed under New York law to request an additional deposit intended to cover any damage caused by a pet. However, access to rental homes for individuals with disabilities who rely on service animals must be equal. This means that a New York landlord is prohibited from discriminating against tenants who have these service animals and cannot charge them an additional security deposit.

Furthermore, the renter is responsible for covering any damages that occur because of their service animal.

Retaining Deposit

New York security deposit laws also specify where such deposit may be stored throughout the duration of the tenancy. We'll discuss this in greater detail below.

Security Deposits May Not Be Stored with Other Funds

Landlords in New York are forbidden from combining security deposits with any other money they may have. Since the landlord is just holding such security deposit for safekeeping, it still belongs to the renter. It must be kept in a banking organization with a New York office if the landlord decides to store it at a bank.

Providing Information About the Deposit

Additionally, the landlord is required to provide the tenant with written notice of the name and location of the financial institution as well as the precise security deposit amount that is theirs.

Accrued Interest

Suppose a landlord acquires or is currently receiving security deposits from leaseholders of a building with a minimum of six rental housing units. In that case, they are required to keep all these funds in an interest-bearing account in a financial institution that accrues interest at a rate that is roughly comparable to other accounts of a like kind.

Allowed Deductions

When it's time to return the security deposit to your tenant, you'll need to know what deductions are permissible. Keep in mind that landlords are only allowed to make use of the deposit retained once the lease term has been reached or when the contract has been terminated. Legally, landlords can use the deposit to cover the following reasonable and itemized costs:

  • Rental arrears
  • Any expenses incurred for storing or transporting the tenant's possessions.
  • Overdue utility payments that are specified in the rental contract.
  • Damage exceeding normal wear and tear brought on by the renter.

The remaining portion of the deposit must be returned to the tenant within 14 days after the tenant vacates the property.

What Deductions Are Not Allowed?

Although it's important to know what costs can be deducted from a security deposit in New York, you will also need to understand what expenses are non-deductible. This will spare you any legal implications and ensure that you are compliant with New York security deposit laws.

According to New York security deposit laws, you may not deduct the cost to repair any damages that were identified during the initial inspection at the start of the lease term. Landlords are also not allowed to deduct the cost of repairs caused by normal wear and tear. You can find out more about deductible damages in the section below.

Normal Wear & Tear

It is important to note that normal wear and tear is not a permissible security deposit deduction, so it is important to understand the difference between normal wear and tear and actual damage. We will explore these two terms below.

Damages

Any damage that occurs as a result of a tenant's carelessness or misuse while occupying a rental property. It lessens the leased unit's value, utility, or ability to function as intended. Here are a few examples of some of the damages that are considered acceptable deductions:

  • Pet destruction
  • Cracked tiles
  • Broken or missing items
  • Shattered windows
  • Holes in the wall

Normal Wear and Tear

This refers to the natural deterioration of the unit that does not result from carelessness, carelessness, misuse, or accidental damage caused by the renter or their visitors. It can appear as follows:

  • Naturally occurring mildew and mold
  • Worn carpeting
  • Wobbly doorknobs
  • Light glass scratches
  • Discolored plumbing fixtures
  • Faded wall paint

Returning Deposit

After the renter vacates a rental property, the landlord will have 14 days to refund the security deposit and provide an itemized statement indicating what deductions have been made.

Tenants Must Receive an Itemized List of All Security Deposit Deductions

A detailed document from the landlord must be included that details how much of the security deposit was kept and for what purposes. It is essential to provide this list because tenants occasionally prefer to pay their last month's rent out of their security deposit. This statement can be sent via registered or certified mail.

What Happens If a Landlord Doesn't Provide the Tenant with the Security Deposit Within 14 Days?

Unfortunately, the right to keep or subtract from the security deposit is forfeited by the landlord if the security deposit is not returned on time, together with an itemized statement of deductions. A tenant has the right to file a small claims action, but the most they may recover is $5,000. The cap is $3000 for village and judicial courts.

Additional Laws

Here are other rules and regulations you'll need to keep in mind:

1. Preliminary Inspections

After the renter signs the rental contract, the landlord is required to let them know that they may request an initial inspection of the rental property to learn more about its current state. A formal agreement between the parties must be created in writing and signed before the renter moves in if this type of inspection is requested.

The state of the property and specifics of any damage and flaws found during the inspection should be specified in the agreement. Moreover, the preliminary inspection contract is generally used as acceptable proof for the security deposit if the landlord fails to return the amount owed at the end of the lease term.

2. Accrued Interest

Unless the security deposit is in an interest-bearing bank account, landlords in New York are not necessarily compelled to pay interest on the amount. Moreover, they are permitted to retain one percent of the security deposit annually as an administrative fee.

At the expiration of the lease, the landlord has the option of returning the security deposit plus interest or using it to reduce the rental amount for the last month's rent. The landlord only has to provide the renter the interest they can obtain at that point in time if the lease expires before the banking organization pays interest.

3. The Sale of the Rental Property

After the property has been sold, the former landlord has five days to take the following actions:

  • Transfer the renters' security deposit to the current owner.
  • Alert the occupants to the change of ownership.
  • Send certified mail with the current owner's address and name to the renters.

If the security deposit is not transferred, the current homeowner may request that the previous landlord open an escrow account, which may be funded with one month's rent for every unit. 

Keep in mind that even if the previous landlord did not transfer a tenant's security deposit to the new owner, the new landlord is nonetheless accountable to the occupants for the security deposit amounts. This would include any applicable interest if they had prior knowledge about it. Landlords are considered to have knowledge about the deposits if they were:

  • Paid six months before the property transfer occurred.
  • It is mentioned in the rental contract.
  • Backed by written documentation (such as that provided by the original landlord following the initial inspection) that the tenant has submitted.

Taxes

You may not have realized this, but a security deposit may be subject to tax. To help you understand what New York security deposit laws say about this, we'll provide more information below.

Is a Security Deposit Considered Taxable Revenue Upon Receipt?

When a landlord in New York collects security deposits, they are not immediately regarded as revenue. This is because such deposit could still be subject to a refund. Thus, the IRS cautions against counting them as income. A security deposit will only be considered taxable income when the landlord is no longer required to return them.

Is a Security Deposit Regarded as Taxable Income Upon the Termination of the Lease?

Depending on what it is used for, a security deposit may or may not need to be recorded as revenue. Here are three straightforward guidelines provided by the IRS:

When the Deposit Is Forfeited

Suppose a lease violation results in the deposit being forfeited or used to cover overdue rent. In that case, the amount maintained must be reported as earnings in the year that it was forfeited.

Deductions for Repairs

The portion of the deposit retained is utilized as revenue if the landlord counts the repair costs as an expense if the security deposit is used to pay for costs that are charged to it. It is not necessary to declare the portion of the security deposit retained to cover them as taxable income if the landlord doesn't usually consider them expenditures.

Using the Deposit as the Final Month's Rent

If both parties have agreed to utilize the deposit, all of it, or a portion of it as the last rental payment, landlords must report it as revenue.

Regulations May Vary from One City to Another

It's important to remember that the rules that apply for security deposits in the state of New York may vary from one city to the next, so it is essential to check the laws put in place by the appropriate local government in your city.

Final Thoughts

Leasing a rental property can be daunting, and handling security deposits can be especially tricky. However, with the right information about New York security deposit laws and tools, you can build a successful business! If you need help managing your tenants, why not try DoorLoop?

Our property management software can help you create lease agreements and other rental documents, receive payments, and so much more! Please book your free demo to try it out for free!

FAQs

Are New York landlords legally obligated to collect a security deposit?

No, landlords in NY are not obligated to request a security deposit. However, the law does cap this amount at one month's rent.

Does the security deposit have to go into an interest-bearing account?

Yes, state law requires the landlord to place the security deposit in an interest-bearing account. When the renter vacates the premises, the deposit, and any accumulated interest (minus any fees required for repairs) are returned to them. Moreover, landlords are required to provide tenants with information about the banking organization where such security money is stored.

Are tenants allowed to use their security deposit as the last rental payment?

There are no laws that prohibit this. If you choose to allow your tenant to use their security deposit as their final month's rent, then you will need to include a provision for this in the lease agreement.

Can I deduct for cleaning expenses once a tenant moves out?

Yes, landlords are allowed to deduct for cleaning expenses, unpaid rent, and other reasonable costs, as mentioned above.

Is a walkthrough inspection a requirement in New York?

If the renter requests it, walkthroughs are necessary. Landlords are obligated to give renters written notice of their rights to an inspection prior to leaving the property and their right to be onsite during the examination as long as renters provide a minimum of two weeks' notice before ending their tenancy.

This inspection is typically done one to two weeks before the lease termination. The tenant must give the landlord 48 hours' written notice before the inspection. Following the assessment, landlords are required to provide the renter with a detailed list of the cleaning or repair expenses that will be taken out of the security deposit and offer them a chance to fix them on their own before moving out.

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Resources

  1. https://law.justia.com/codes/new-york/2021/gob/article-7/title-1/7-103/
  2. https://legislation.nysenate.gov/pdf/bills/2019/a8281
  3. https://www.crvlaw.com/new-york-security-deposit-faq
  4. https://www.findlaw.com/state/new-york-law/new-york-security-deposit-laws.html
  5. https://www.nysenate.gov/legislation/laws/GOB/7-108
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!