Understanding California Security Deposit Laws

How It Started vs. How It’s Going: Security Deposits Then and Now

Security Deposits Then For years, the law of the land in California has been pretty consistent around security deposit limits. For an unfurnished rental unit, the maximum security deposit amount has been the equivalent of two months’ rent. For a furnished rental property, the maximum security deposit amount has been the equivalent of three months’ rent. This makes sense; your tenants are putting a deposit down on damages to that furniture as well as to the property.

Security Deposits Now Effective July 1, 2024, the security deposit limit for rental properties in California became the equivalent of one month’s rental amount. This applies to rental properties that are furnished as well as those that are unfurnished. The new law is a result of AB 12, and it’s a big change in California security deposit law. It’s much different than what we’ve been doing for so many years.

Security Deposits and Competition

There is no single standard to how much of a deposit you should be charging in California, but with this new law, you have less of a choice. We would rarely see a security deposit exceed the amount of one month’s rent in California, even when the law allowed a landlord to collect more. It’s pretty common to see security deposit amounts the equivalent of one month’s rent. 

It’s about competition.

Asking for too much in a security deposit would simply deter potential renters from choosing your property. 

Let’s say you’re renting out a home for $2,600 per month. Most prospective tenants would assume that the security deposit would also be $2,600. But, if you were asking for a security deposit that’s 1.5x the monthly rent ($3,900), or even twice the monthly rent ($5,200), prospective tenants might not choose your property. Instead, they’d choose a similar rental home that only required the $2,600 security deposit. 

You want your property to look more attractive to prospective renters, and the security deposit has always been a way to be competitive in this market, where tenants have choices.

Now, the playing field is a bit more level. There’s a maximum security deposit for everyone. 

Well, not quite everyone.

Exceptions to New Security Deposit Restrictions

New rental laws in California are always interesting. There are always going to be very strict laws, which come with a lot of details and interpretations. And then, there are going to be exceptions. There will be carve-outs. It makes things more interesting for all of us when it comes to keeping up with the laws. 

Let’s talk about our understanding of exemptions. Don’t assume you’re exempt if this sounds like you, though. Talk to an attorney to make sure.

As far as we can tell, these are the landlords in California who are exempt from the new security deposit laws:

• If you own two or less rental properties or four or less rental units, you are exempt. 
• Two duplexes? Exempt.
• One single-family home and a triplex? Exempt.
• Two single-family homes? Exempt.

When you fall into one of these categories, you can continue to charge up to twice the monthly rent. But, will you really want to? Most of the other landlords across the state will be beholden to the new limits. Your tenants are really going to want to live in your property if they’re required to pay twice in a security deposit what they’d have to pay elsewhere.

That’s not to say there aren’t very good reasons to ask for a little bit more. Maybe you have tenants moving in with two 100-pound dogs. You know that’s going to cause more deterioration and potential damage to your property. It would make sense to ask for more of a deposit if you can do it. 

To qualify for this exception, the rental property owner must hold the property as a natural person, a limited liability company (in which all members are natural persons), or as a family trust. It will not apply to corporations. Oh, and there’s an exception to the exception: if you have a military tenant, you cannot claim an exemption to the security deposit amount. You can only charge the one-month equivalent.

There’s a lot of nuance around exceptions. Be careful. Talk to your local property management expert or consult with an attorney. You want to be sure. 

What About Security Deposits You Collected Years Ago?

Did you collect a security deposit from your tenants years ago that exceeded this new limit?

Not to worry.

AB 12 limits apply only to new security deposits obtained after July 1, 2024. 

The security deposits collected before this date, provided they were lawfully obtained, can remain unchanged. You don’t have to return any of the deposit amount before the end of your lease term.

Can I Collect a Pet Deposit In Addition to the Security Deposit?

No.

Another part of AB 12 clarifies the “what do we do” question around pet deposits vs. security deposits.

Remember that scenario we discussed earlier? With the two 100-pound dogs? Well, pet deposits are considered part of the overall security deposit. You have to include the pet deposit with the security deposit, and both of them together cannot be more than the one-month limit. Rental housing providers can no longer demand additional deposits specifically for pets beyond this limit.

Sorry.

Can I Collect First Month’s Rent, Security Deposit, and Last Month’s Rent? 

That’s going to be another no.

Under AB 12, rental property owners can charge the first month’s rent in advance of a tenant moving in, because this is a pretty standard practice and what we’d advise you to do anyway. Always collect certified funds so you don’t have tenants moving in while their check bounces. 

However, while you can and should collect both the security deposit and the first month’s rent up front, you cannot charge the “last month’s” rent separately and hold it apart from the security deposit until the end of the lease, when the tenant has given their notice to vacate. If you do collect the last month’s rent, that would be considered part of the security deposit and subject to the one-month limit. We don’t advise this. Collect your security deposit. Collect the first month’s rent. Proceed. 

What AB 12 Means for California’s Rental Market 

Does this have an immediate impact on you and your profitability? 

We don’t believe so. As long as you’re screening tenants carefully and maintaining strong relationships with your residents throughout the tenancy, we can’t see how this puts you or your earnings at risk. One month’s rent for a security deposit should be enough to protect yourself and your property. 

There will likely be an overall trend towards lower security deposits throughout California thanks to AB 12. As we mentioned earlier, it’s about competition. Larger property owners with extensive portfolios have already been moving towards keeping their security deposits lower to attract renters and reduce vacancy rates. The market has already been moving in this direction, and it will be very rare to see a security deposit that’s any more than the one-month rent maximum, even in properties that are exempt.

Are you an owner who is exempt and considering charging the two months of rent you feel entitled to?

You might want to consider the competitive disadvantage of higher move-in costs for tenants who are already displeased with higher rental values. The larger your security deposit, the more you might deter potential renters, especially those with good credit and positive rental histories who have plenty of other housing options.

The idea behind this bill is equity for tenants, and achieving a more accessible rental market for everyone in the state who needs housing. By capping security deposits at one month’s rent and providing specific exceptions for small rental property owners, the bill markets itself as an attempt to balance the interests of both renters and owners. 

Beyond the Bill: What Else is There to California Security Deposit Law?

We promised a full look at California security deposit law, and now that we’ve fully explained and analyzed the new provisions in AB 12, let’s talk about the old school laws that are still very much in place. Like timelines and reasons to withhold all or part of the deposit. 

There’s still so much more to talk about…

What You Don’t Have to Do

Believe it or not, there are some security deposit laws across the country that do not apply to California rental property owners. Here’s what not to do

You Do Not Have to Provide a Receipt It doesn’t mean you shouldn’t. We happen to like receipts, written or digital. But, don’t lose any sleep about violating California security deposit law because you didn’t provide a receipt to your tenants. Our suggestion? Mention the security deposit amount you collected in your lease agreement. That way, it’s in writing somewhere.

You Do Not Have to Pay Interest In some cities, like San Francisco, interest is required to be paid on security deposits that landlords collect from their tenants. This is not state law, however, and here in Solano County, you are not under any obligation to hold the tenant’s security deposit in an interest-bearing account.

You Do Not Have to Keep the Deposit in a Specific Account Not afraid of mingling your business funds with your personal funds? Go ahead and deposit the amount you collect from your tenants into your own bank account. There is no requirement in California that you keep it in a separate account. We don’t recommend this, of course. A separate account is safer for you personally and for your tenants.

 

But Please Remember This We’ve spent some time talking about what you don’t have to do, but here’s one important part of California’s security deposit law that you absolutely need to remember. Security deposits are always refundable.  You cannot put something ridiculous in your lease agreement about the deposit not being refundable. You’re legally required to return that deposit at the end of the tenancy, minus any amounts you lawfully keep.

California Security Deposit Timelines: When Do You Have to Cut a Check?

Once the end of the lease term rolls around, or the rental agreement has been terminated, California landlords have 21 days to return the security deposit to the tenant. You will want to:

• Provide a list of expectations before move-out so that tenants understand how to get their full deposit back. You want the property to look the way it did when your tenants moved in. So, if they painted a wall or moved in their own washing machine, they’ll need to make the necessary changes that restore the original look of the property. 
• Offer a pre-move out inspection. California law requires this. About two weeks before your tenants leave, they can ask to be present for your walk-through inspection. This can benefit both of you. They’ll get an idea of where they might lose money on a security deposit charge, and you will get an idea of how long it might take to turn the property over.
• Get a forwarding address. In order to get the deposit into your tenant’s hands within those 21 days, you need to know where to send it. Ask them for a forwarding address, and explain why you want it (some tenants will be protective about sharing their new address with you; assure them it’s for the deposit return and not because you’re planning to show up at their new digs).

The 21 days means you have to work quickly. Once your tenants have vacated, get in there to conduct your full move-out inspection. Schedule your vendors. Get any necessary work done. 

Deductions from the Deposit

There are two important considerations here. How you document the deduction and why you might make the deduction.

Documenting your deductions is critical. If you’re going to charge the security deposit for a hole in the wall you had to patch or for hauling services because some furniture and trash were left behind, you want to include a receipt for the cost of that work. When you return only part of the deposit or none of the deposit because the expenses were more than what you collected, you need to include an itemized list of what you kept and why. 

Reasons to Keep a Security Deposit in California

Tenant-Caused Property Damage When a tenant vacates your property and leaves damage behind, you can use the security deposit to pay for that damage. Just make sure it’s actually damage, and not normal wear and tear.  Is there an official legal definition of normal wear and tear? No, of course not. But you need to know what it is. We consider those small nail holes from where pictures were hung to be wear and tear. Scuff marks on floors and walls -wear and tear. The damage is more severe, more costly, and hopefully well-documented. Those move-in and move-out condition reports will help you prove it.

Unpaid Rent or Utilities  When your tenants leave your property owing you rent, you can use the security deposit to bring their account current. Again, make sure you can document what is owed, and only keep what is owed. Maybe they never paid the last month’s rent. Maybe they only paid half a month’s rent. Maybe you’re trying to turn the electricity back on in your name, but there’s an overdue balance on the account. Whatever the situation, you can keep money owed from the deposit.

Cleaning Fees Hopefully, your tenants leave the property in a condition that’s as clean as it was when they arrived. We also hope that you are clear with your expectations around the cleaning at the end of the lease term.  If you have to pay to have the home professionally cleaned because those standards were not met, you can charge the deposit. Always be clear why this charge has been taken out, and remind tenants of what they agreed to at move-in.

As you can see, keeping up with all of the laws in California can be a full-time job. It’s important to be working with a professional property manager who can ensure you’re compliant.

Looking for a video summary of what we’ve discussed? Find it here: https://youtu.be/eQaEPjRxrhA?si=QWl9veApe_5svnuf

If you have questions about security deposit laws in California, or you’d like to talk about Solano County property management, please contact us at Krystle Properties. We lease, manage, and maintain rental homes in Vallejo, Benicia, Fairfield and surrounding areas.