Property Management App Builder

Security Deposits: Limits, Holding, Deductions and Returns (2026)

How landlords should set, hold, deduct from and return security deposits, with a worked itemized statement and deadlines and penalties from California, New York and Texas.

Floot ·

Key Takeaways

  • Know your cap. California limits most deposits to one month’s rent (two months for some small individual landlords) since July 1, 2024. New York caps deposits at one month. Some states have no cap.
  • A deposit is not income. IRS Publication 527 says not to include a security deposit in income when you receive it. Record it as money you owe back, and include in income only the part you keep.
  • Deduct only what you can prove. Unpaid rent and damage beyond normal wear and tear, backed by move-in and move-out records, photos and receipts. California requires receipts when deductions exceed 125 dollars.
  • Deadlines are short and penalties are steep. 14 days in New York, 21 days in California, 30 days in Texas. Missing them can cost you the right to keep anything, plus damages.
  • The itemized statement is the product. Each line should name the item, the reason, the amount and the evidence. A clear statement prevents most small claims cases.

Quick-Start Prioritization Framework

StateMaximum depositReturn deadlinePenalty for getting it wrong
CaliforniaOne month’s rent; two months for an individual (or LLC of individuals) owning no more than two rental properties with no more than four units for rent21 days after move-outDeposit plus up to twice the deposit for bad faith retention
New YorkOne month’s rent (most units)14 days after the tenant vacatesMissing the 14-day statement forfeits the right to keep any of it; willful violations up to twice the deposit in punitive damages
TexasNo statewide cap in Chapter 9230 days after the tenant surrenders the premises100 dollars plus three times the amount wrongfully withheld plus attorney’s fees for bad faith

A security deposit is the tenant’s money that you hold as protection. Treated that way, it is simple: collect an amount the law allows, keep it separate and on the books as a liability, deduct only what the law and your records support, and return the rest with an itemized statement before the deadline. Most deposit disputes, and most of the penalties that come with them, happen because one of those steps was skipped. This guide covers each step with a worked deduction example and the current rules in California, New York and Texas, three states with very different approaches. It is general information, not legal advice; check your state and city rules.

Setting the deposit

Start with your state’s limit, then decide what the deposit needs to cover. A deposit that equals one month’s rent is common and, in many states, the maximum.

California’s 2024 cap

Under AB 12, deposits collected on or after July 1, 2024 are capped at one month’s rent, furnished or unfurnished. San Francisco’s summary of the law explains the exception: an owner who is a natural person, or an LLC whose members are all natural persons, and who owns no more than two residential rental properties with no more than four units offered for rent, may collect up to two months. The cap applies to security however it is labelled, so a separate pet deposit or “last month’s rent” counts toward it.

New York’s cap

General Obligations Law 7-108 limits deposits and advances to one month’s rent for most residential units, with narrow exceptions such as some seasonal rentals and owner-occupied cooperatives.

Higher deposits as a screening condition

If you ask one applicant for a larger deposit because of something in their credit or screening report, you owe them an FCRA adverse action notice, and the larger amount must still fit your state cap.

Deposit or last month’s rent?

They are different. Prepaid last month’s rent is rent, and IRS Publication 527 treats advance rent as income in the year you receive it. A deposit can be applied to unpaid rent at the end, but label each clearly in the lease and the ledger.

Holding the deposit

Keep deposits out of your operating account. Even where your state does not require a separate account, a dedicated deposit account makes it obvious that the money is not yours to spend.

Separate accounts and interest

Some states require deposits to be held in a separate or trust account, in a bank within the state, or in an interest-bearing account, sometimes only above a certain number of units, and some require you to tell the tenant where the money is held. Check your state statute. If you manage deposits for other owners, your state real estate regulator may also have trust account rules; California’s Department of Real Estate, for example, requires monthly trust account reconciliation by brokers.

On the books

Record a deposit as a liability, not income. The IRS says not to include a security deposit in income when you receive it, and to include any part you keep, for example because the tenant broke the lease, in income for the year you keep it.

When a property is sold

Deposits generally have to transfer to the new owner, with notice to the tenant, under rules that vary by state. Include a deposit list in any sale.

What you can deduct

The categories are broadly similar across states. New York’s list, for example, covers unpaid rent, damage beyond normal wear and tear, unpaid utilities the tenant was responsible for, and moving and storage of a tenant’s belongings. California’s courts list cleaning to return the unit to its move-in level of cleanliness, repair of damage beyond normal wear and tear, and unpaid rent.

What you cannot deduct

Normal wear and tear: faded paint after several years, light carpet wear, small picture-hanging holes. Texas Property Code 92.104 and New York General Obligations Law 7-108 both say so explicitly. You also cannot deduct to restore the unit to better than move-in condition, or charge new-item prices for something that was already old.

Evidence requirements

California requires receipts or invoices when deductions exceed 125 dollars, and if you or an employee did the work, a description of the work, the time spent and a reasonable hourly rate. Since April 1, 2025, California also requires photos before and after any repair or cleaning you deduct for, and since July 1, 2025, move-in photos for new tenancies. New York lets the landlord deduct only for conditions not listed in a signed move-in report.

A worked itemized statement

A California tenant paid an 1,800 dollar deposit and moved out with rent paid in full. The move-in report and photos showed clean carpet and a freshly painted living room. At move-out: a pet stain in the bedroom carpet, a TV mount with large holes in the living room wall, and an unpaid final water bill the lease made the tenant responsible for. These figures are my own illustration.

ItemReasonAmountEvidence
Bedroom carpet stain treatmentPet urine stain; carpet clean at move-in240.00Before and after photos; vendor invoice
Living room wall repair and paintHoles from TV mount removal; wall freshly painted at move-in180.00Photos; 3 hours of owner labor at 60 dollars an hour, described
Final water billTenant-responsible utility under the lease85.40Utility bill
Total deductions505.40
Refund1,800.00 minus 505.401,294.60Sent within 21 days

Why this statement holds up

Every line ties to a move-in record, a move-out photo and a receipt or labor description. Because deductions exceed 125 dollars, the receipts and labor details are attached. Nothing is charged for normal paint fade or carpet wear in hallways.

If repairs aren’t finished in time

California’s courts’ guide says that if repairs cannot be completed within 21 days for a good reason, you can send a good-faith estimate and then send receipts within 14 days after the work is done. Do not miss the 21-day statement while waiting for a contractor.

Returning the deposit on time

Put the deadline on your calendar the day the tenant gives notice, not the day they leave.

New York: 14 days

Within 14 days after the tenant vacates, provide an itemized statement and return the remainder. If you miss the 14 days, you forfeit the right to keep any part of the deposit. You carry the burden of proving that what you kept was reasonable.

California: 21 days

Within 21 days after move-out, return the full deposit or the balance with an itemized statement, receipts if over 125 dollars, and photos for repair and cleaning deductions. The courts’ guide notes a tenant can recover up to twice the deposit in damages if a judge finds bad faith.

Texas: 30 days

Refund on or before the 30th day after the tenant surrenders the premises, with a written itemized list of deductions (unless the only deduction is undisputed unpaid rent). A landlord who neither refunds nor itemizes by day 30 is presumed to have acted in bad faith, and bad faith retention costs 100 dollars plus three times the amount wrongfully withheld plus attorney’s fees. Texas also has a rule tying the refund to the tenant giving a forwarding address (Section 92.107).

Common mistakes with security deposits

Each of these turns a routine refund into a claim.

  • Collecting more than your state allows, often by adding a pet deposit on top of a full-month deposit.
  • Spending the deposit as operating cash.
  • Recording deposits as rental income.
  • No move-in inspection, so every deduction is your word against the tenant’s.
  • Cleaning before taking move-out photos.
  • Charging for normal wear and tear or full replacement of old items.
  • Missing the deadline while waiting for a final invoice.
  • A statement with one line that says “cleaning and repairs: 900 dollars.”

Keeping deposit records straight

If you’d rather not track this yourself, most landlord platforms keep deposits on the tenant ledger and generate a statement. If you build your own rent ledger with Floot, store the deposit as its own line type, link inspection photos to the unit, and set a reminder for your state’s return deadline; you would still decide the deductions yourself.

Frequently Asked Questions

How much can a landlord charge for a security deposit?

It depends on your state. California caps most deposits at one month’s rent (two months for some small individual landlords). New York caps them at one month. Some states, including Texas, have no statewide cap.

How long does a landlord have to return a security deposit?

Examples: 14 days in New York, 21 days in California and 30 days in Texas after the tenant leaves. Check your state, because penalties for missing the deadline can be severe.

Can a landlord keep the deposit for cleaning?

Usually only to return the unit to the cleanliness it had at move-in, and only with evidence. California requires photos before and after for cleaning deductions and receipts when deductions exceed 125 dollars.

Is a security deposit taxable income?

Not when you receive it, according to IRS Publication 527. Any part you keep is income in the year you keep it. Prepaid last month’s rent is income when received.

Can I use the deposit as the last month’s rent?

A landlord can apply a deposit to unpaid rent after move-out, but tenants generally cannot insist on using it as last month’s rent unless the lease or state law says so.

What happens if I miss the deposit deadline?

In New York you lose the right to keep any part of it. In Texas you are presumed to have acted in bad faith, which can mean 100 dollars plus three times the amount withheld plus attorney’s fees. In California a tenant can sue for the deposit plus up to twice the deposit for bad faith.

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