Handling Security Deposit Returns


When you rent out a home, you typically collect a security deposit from your tenants before the lease begins. This is a refundable sum of money that the tenant gives to the landlord as protection against unpaid rent, property damage, or a lease break.

If there’s going to be conflict between landlords and tenants, it’s likely to be due to the security deposit. Sometimes, tenants will expect that they’ll get the entire amount refunded, even if they’ve left the property in terrible condition. Owners can also believe that even the most minor deterioration at the property should be damage that’s paid for out of the tenant’s security deposit.

The security deposit laws in Arizona provide for how long you have to return the deposit, what you can deduct for, and how much you can collect.

The return of the security deposit is usually the most challenging part of the process for owners in Phoenix and throughout the East Valley. That will be the focus of our blog today. We’ll also highlight some of the other factors you’ll have to consider in the way you collect and hold your tenant’s deposit.

Finally, we’ll talk about what to do if a tenant pushes back and disputes a claim you’re making against the security deposit.

What Can You Deduct From a Security Deposit?

The biggest question that property owners often have when they’re dealing with security deposits is: what can I deduct?

You have the right to withhold all or a portion of the tenant’s security deposit from the tenant for:

  • Damage that exceeds normal wear and tear

  • Unpaid rent

  • Lease violations

If you’re going to deduct for unpaid rent, you’ll simply have to prove that the tenant owed rent and didn’t pay it, so you used the deposit. A number of different scenarios could trigger this deduction. Maybe a tenant broke the lease and left months before the end of the lease term, leaving you to find a new tenant. You can apply the security deposit to the rent that wasn’t paid. Or, perhaps a tenant paid less than the full amount the last two months of the tenancy. If that created a balance on their account, you can use the security deposit to bring it up to date. If a tenant skipped a full month and did not pay rent, you can use the security deposit.

You can also withhold any money that’s required to cover the removal of a tenant’s personal belongings that are left behind. When a tenant leaves furniture or trash, you need to have that stuff hauled out of the home so you can begin preparing it for a new tenant. You can use the security deposit funds to cover those costs.

The most common reason that deductions are made from the security deposit is property damage.

This isn’t always easy to identify, but it’s important that you know the difference between damage and normal wear and tear. You cannot deduct the normal wear and tear items. Making those repairs is your responsibility as the property owner. It’s considered the cost of doing business.

Tenant damage, however, is their responsibility. You hold those residents accountable by deducting the cost of repairs from the security deposit.

Always create an itemized list of the deductions you do make. Provide supporting documents and details such as invoices and repair bills. You’ll also want before and after photos that show the damage was clearly done during the lease period. Move-in and move-out inspections are important and can protect you from any disputes or conflicts.

Returning a Security Deposit in Arizona: Timelines

You have 14 days from the termination of the lease agreement to return a tenant’s security deposit.

If you conduct an inspection and you find that no damage was done and the tenant left the property in the same condition that it was when they moved in, this will be an easy process for you. Simply send the money to the forwarding address that the tenant should have provided when they moved out.

If you find you will be making deductions from the deposit for repairs associated with tenant damage, you’ll need to provide an itemized list with an explanation for each deduction and the amount being withheld.

The 14 days you have to return the deposit do not include weekends or holidays. Send it back quickly so there’s no risk of having it arrive late to your tenants. If the departing tenant did not provide you with a forwarding address, you can send it to the last known address, which is likely your own rental property.

Consequences for Mistakes With Security Deposit Returns

If you fail to lawfully return the balance of the security deposit to the tenant within 14 days, the tenant may recover the property and money due the tenant together, with damages, in an amount equal to twice the amount wrongfully withheld.

This is not a penalty you want to face.

When your tenant contacts you because they believe that you were unfair in what you withheld, be willing to talk with them. Show them the pictures you have that documents the damage. If they’re still pushing back, see if you can negotiate some kind of middle ground. You may win your case in court, but at what cost, really? Arguing with a tenant over $200 may not be worth your time, even if you’re right. Be judicious about how far you’re willing to go in a security deposit fight.

Collecting and Holding Arizona Security Deposits

Now that you know how to successfully return a security deposit, we need to talk about some other security deposit rules and regulations that govern how you collect and hold it. Arizona is pretty easy when it comes to security deposit law. Some states have strict rules about what type of bank account you keep the deposit in and how much interest you have to pay your tenants on the deposit you hold. Here are some facts:

  • There is no requirement for you to pay interest on a security deposit. Even if you hold it in an interest bearing account, you do not have to turn those interest earnings over to the tenant when you return the deposit or renew the lease.

  • There’s no requirement that you hold the deposit in a specific bank account. If you’re an out-of-state investor who lives in California, you can keep the deposit in a California bank.

  • There’s no requirement that the security deposit funds do not co-mingle with other funds. We find that a lot of property owners are more comfortable keeping the security deposit separate, but it’s not legally required.

Here’s one restriction that the state of Arizona is pretty serious about: security deposit amounts.

Legally, you cannot collect any more than the equivalent of one and one-half month’s rent as a security deposit. So, if your rent is $1,500 per month, your security deposit will max out at $2,250 per month.

Most owners ask for a security deposit that’s the equivalent of one month’s rent. This keeps your rental property competitive and ensures you have enough to cover potential damage or unpaid rent. If you want to take the full amount that’s legally allowed, that’s fine. You’ll need a tenant who can come up with that kind of cash before moving into your home.

Security deposits need to be refundable. In fact, if you’re going to collect any nonrefundable fees or deposits, such as a pet fee, you need to notify your tenant in writing through the lease agreement.

How to Prevent Security Deposit Disputes

Security deposit disputes are unpleasant. They can be expensive, too, and time consuming. How can you reduce the likelihood that you’ll have tenants who complain about what you’ve withheld or take you to court?

Here are a few ideas.

  • Make sure you conduct thorough move-in and move-out inspections. When you have a complete inspection report that includes photos and even videos, you can prove without any doubt the condition of your property before and after a tenant took possession. Do your move-in inspection right before the tenant gets the keys and moves. Give them the opportunity to note any damage or problems on the move-in inspection report. Then, conduct another inspection after the tenant has moved out. If you see evidence of damage and you plan to deduct for it, take photos and make notes.

  • Develop a good relationship with your tenants. There are generally fewer issues when the landlord and tenant work well together. If you have a good relationship in place, you can talk openly and transparently about how to ensure they get their deposit back.

  • Conduct at least one routine inspection during the lease term. This will give you an opportunity to assess how the tenant is maintaining and caring for your property.

You can also work with a property management company. We understand security deposit laws, best practices when it comes to protecting your property, and tenant relationships.

If you have any questions, please don’t hesitate to contact us at TCT Property Management Services. We manage homes in the East and West Valley, including Mesa, Gilbert, Chandler, Scottsdale, and Phoenix.