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Handling Security Deposit Returns | Norfolk Property Management Education

Handling Security Deposit Returns | Norfolk Property Management Education

Security deposit returns are a frequent source of friction between landlords and tenants in Norfolk. Landlords find it difficult to deal with various aspects associated with the entire process, such as checking for damages, evaluating deductions, and facing legal situations. However, knowing the step-by-step process of refunding a security deposit can protect you against such scenarios. 

Here are a few things Norfolk landlords should keep in mind while dealing with security deposit refunds. 

1. Know The State Laws For Security Deposit Returns

Virginia law allows you to charge the security deposit to protect yourself and your property against unexpected damages, unpaid rents, unpaid utilities, and other charges included in a lease agreement. But when the lease ends, you are responsible for returning the deposit, or else it can lead to financial and legal conflicts. 

You can charge the security deposit equal to two months' rent and should return the amount within 45 days of the tenant's move-out. It will be unlawful if you refuse to return the rent deposit or deduct any amount for minor repairs.

2. Conduct Move-Out Inspection To Spot Potential Damage

Property inspection lets you keep track of the property conditions. So, make sure you check the exterior and interior of the Norfolk property by yourself or through a professional property inspector. 

But remember that you should be able to differentiate between significant damage and normal wear and tear. For example, fading paint and residue marks on floors are signs of normal wear and tear. Whereas torn or missing curtains, and burn stains on the carpet are examples of significant damage. 

Additionally, you must also check whether:

  • The HVAC systems are functioning well

  • The walls, roof, and flooring are intact

  • The appliances are working smoothly

  • There are no clogging or leakage issues with the plumbing

3. Know What You Can Deduct From the Security Deposit

Once you inspect the Norfolk unit thoroughly, it is time to think about possible deductions. However, the law doesn’t allow landlords to deduct the repair cost for routine maintenance or gradual degradation of the property. It only permits making the following deductions.

  • Permissible Deductions

As a landlord, you have the right to make deductions in case tenants cause potential damage and do not pay rent in time. You can also cover cleaning fees from the rent deposit if tenants leave the unit in a messy condition and charges allowed under the lease agreement.

  • Deducting for Utilities

While signing the lease agreement, landlords offer utilities, such as gas, water, electricity, and sewer in a rental property. Tenants are responsible for paying the bill for the utilities provided. But if they do not, you can withhold the security deposit or make appropriate deductions from it.

  • Deductions During The Lease

You can make deductions from the security deposit for things you have mentioned in a lease agreement. For example, if tenants abandon a unit, you may undergo significant loss. But if you have added a clause related to this, you can withhold the security deposit until tenants reach out to you and clarify things.

4. Let Tenants Know About Deductions You Will Make From The Security Deposit

After deciding the tentative deductions you are going to make, it is time to get in conversation with your tenants. Consider showing the documentation of damage you have prepared during inspections to ensure transparency. Good tenants will accept their mistakes and pay for the repair costs immediately. But some may refuse to pay for itemized damage or go to court to raise concerns. However, it is always advisable to solve the matter out of court as the process is quite tiresome. 

5. Returning Rent Deposits in Virginia

In Virginia, landlords are responsible for returning the security deposit within 45 days from the end of a lease agreement. So, if you have withheld the amount, you must send a written notice via email or in-person to the tenants’ address with an itemized statement, deductions made from the deposit, and the balance or remaining amount. 

In case you fail to return the deposit within the allocated time, you may need to pay the whole amount of the security deposit along with the damages, legal fees, and cost of the suit as a penalty. In Virginia, tenants might sue you for the maximum amount of $5,000. If tenants do not pay rent, the court can allow the landlord to keep the portion of the amount of rent from the deposit.

Sometimes tenants may fail to provide a forwarding address to you. In such cases, you may keep the security deposit for one year. If there are multiple tenants, you may pay a security deposit with one check to all unless agreed by each tenant and send it to the forwarding address. As per law, a landlord should send the remaining amount of the deposit to the commonwealth or credit to the Virginia Housing Partnership Revolving Fund.

6. Maintain All Documentation To Avoid Disputes

Thorough paperwork is crucial when allowing tenants in your property and when they move out from your property. Make it a point to keep the move-in inspection report with you. It allows you and your tenants to compare the pre- and post-condition of your property. Pictures can also support your inspection reports and help you maintain transparency during the tenancy.  

Documenting the expenses is also critical to avoid disputes over the security deposit. Keep the record of money that you spent on cleaning and repairing after tenants move out. Consider documenting invoices, appropriate bills, and receipts to justify your claims. It will help you avoid disputes that come with the security deposit returns. If tenants disagree with your claims, you can use these papers as proof to deduct repair costs from the deposit. 

Apart from documenting the papers, there are other ways to avoid disputes or resolve them, such as

  • You can talk to your previous tenants and can try making an informal settlement 

  • Crosscheck the charges you made.

  • Understand whether you made reasonable deductions or if they are overreaching in terms of pre-property conditions.

  • Ensure that you have complied with statutory regulations.

  • Be organized and diligent.

  • Set clear expectations when tenants move in and reiterate those expectations when they move out.

  • Try to avoid court scenarios, especially when you are losing the case.

7. What If You Are Selling the Property?

Sometimes, you may need to sell your rental property for several reasons, such as job loss, health issues, and financial crisis. In such cases, it is the new owner’s responsibility to return the security deposit to tenants that you have to withhold for certain causes. Buyers need to make sure that the receipt of the amount is included as a condition in the purchase agreement. 

8. Security Deposit And Tax Filing

A security deposit doesn’t count as a taxable amount until the landlord keeps it in a bank account. There are specific rules associated with it.

  • Are Security Deposits Taxable?

A security deposit is a fee that landlords charge to protect themselves against financial expenses and damages. It does not count as a taxable income automatically as the landlord has to return it to tenants. But if a landlord keeps a portion of it or all the security deposit during any year, it is treated as taxable income. 

  • Reporting Security Deposit As An Income

In certain scenarios, the security deposit is considered an income, but it depends on what you use it for. IRS (Internal Revenue Service) suggests three rules to follow. 

             - When a landlord withholds a security deposit for unpaid rent or due to a breach of the lease, it is declared as income in the year the landlord withholds it. 

             - If landlords deduct repair expenses from the security deposit, they can treat a portion of it as income, but if they do not include expenses, then there is no need to treat it as income.

             - If tenants and landlords agree upon using a security deposit or a part of it as the rent for the final month, landlords should consider it as income.

9. Additional Rules In Virginia

There are several rules Virginia landlords should follow while managing security deposit returns. 

  • Landlords do not need to provide a receipt for the holding deposit in Virginia. 

  • Landlords should keep a record of all deductions from the deposit up to the last two years.

  • Virginia law does not require landlords to pay interest on the renting deposit. 

  • When landlords conduct move-out inspections, they should ask tenants to be present there during the process or for making deductions. 

  • According to the law, landlords should conduct a property inspection within 72 hours.

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Hiring an experienced Norfolk property management company like Doud Realty Services can help you handle the security deposits while preventing any conflicts. Doud Realty Services is a renowned and trusted property management company that offers rental property services in Norfolk and Hampton Roads. Our team assists landlords in handling security deposit returns, running property inspections, and documenting damage.

For more information, contact us at Doud Realty Services.