The security deposit is the most heavily regulated dollar in landlording. Every state sets rules on how much you can collect, where it must sit, and how fast it must come back — and violations often carry double or triple damages plus attorney's fees. Handle it like the regulated trust money it is.
Collecting and holding
Most states cap deposits at one to two months' rent; typical practice is one month. Some states require a separate or even interest-bearing account, and several require telling the tenant where it's held. Never treat the deposit as income — it's the tenant's money held conditionally. Collect it in full before move-in, with the amount and conditions stated in the lease.
The move-in/move-out paper trail
Deductions live or die on documentation. Do a move-in inspection with a written condition report and timestamped photos, signed by the tenant. Repeat the identical walkthrough at move-out. The legal standard almost everywhere: you may deduct for damage beyond normal wear and tear (holes in walls, broken fixtures, burns) but not for normal aging (minor scuffs, worn carpet paths, faded paint). No before-and-after evidence, no defensible deduction.
Returning it
Deadlines commonly run 14–30 days after move-out, with an itemized statement for any deduction — actual repair invoices beat round-number estimates. Missing the deadline in many states forfeits your right to deduct anything and can trigger penalty multiples. Calendar the deadline the day the tenant gives notice.
Worked example
Tenant vacates a $1,500 unit with a $1,500 deposit. Move-out shows a broken closet door ($140 invoice) and a badly stained carpet in one room ($260 cleaning). Faded paint after three years is normal wear — not deductible. You send an itemized letter with both invoices and a check for $1,100 on day 12 of a 21-day deadline. Total exposure if you'd instead kept the full deposit casually: in a double-damages state, $3,000 plus fees.
When this rule of thumb breaks
Rules are hyper-local — deposit caps, deadlines, receipt requirements, and interest obligations vary by state and sometimes city, so verify yours rather than assuming these ranges. "Non-refundable deposits" are illegal in many states (use a clearly named fee where allowed instead). Unpaid rent can usually be deducted, but chasing damage beyond the deposit means small-claims court. When a dispute looks likely, an hour with a local attorney costs less than one statutory penalty.