Accounting of your security deposit
Q: Should my landlord keep my security deposit in a separate account? If so, shouldn't he return the security deposit with the interest earned?

A: Surprisingly, most states do not require a landlord to keep your security deposit in a bank account separate from other funds, such as rent receipts. Most states also do not require a landlord to pay interest on your security deposit.

Roughly a third, however, do have a requirement like this. Some states require a separate bank account, some states require the payment of interest, and a very few states require both. Indiana, where you live, does not have either requirement.

Depending upon the amount of your deposit, this can add up. For example, if your landlord paid you 5% interest (a typical amount) on a $500 security deposit, you'd earn $25 each year. While that's not winning the lottery by any stretch of the imagination, it's enough for a large pizza and a six pack at least. And, this amount adds up year after year if you're a long-term renter.

In the states that require interest payments, the rate is usually either the standard savings account rate (currently about 3%) or the standard money market rate (currently about 5%). Many of these states permit the landlord to keep a small portion of the interest to cover the administrative costs of calculating the interest.

In the states that require the landlord to keep a separate bank account for deposits, they must identify it. Typically, the written lease will list the name of the bank where the landlord keeps the deposit account. The landlord with several units can, however, combine the security deposits of all of his tenants in one separate bank account. The landlord does not need to set up a separate bank account for each tenant.

Even if a state law doesn't require it, some landlords may pay interest voluntarily. (Yeah, right!) Or, you can always ask your landlord to pay interest. If he agrees, make sure you add that to the written lease terms.

Living out your security deposit
Q: Can I live out my security deposit?

A: The tenant's revenge-a solution to the difficulty of getting your deposit back from the landlord-involves the practice of "living out" your security deposit. This practice forces the landlord to use all or most of your security deposit for your last month's rent.

Most leases prohibit this either specifically or impliedly. But, given the questionable charges made against security deposits by many landlords, the practice persists. Technically, it's a breach of your lease, so I can't recommend it. But, it is a way to protect yourself from losing a large portion of your security deposit if you've taken good care of your rental.

Ordinarily, if you fail to pay the full last month's rent, the landlord won't have the opportunity to evict you prior to the date you intend to move out. You do need to make sure you know your state law to be sure this won't happen though. If state law permits an eviction in two weeks, you might be evicted two weeks before you intended to move out.

The practice of living out your security deposit does have some potential pitfalls. First, if you need a recommendation to move to a new place after you do this, you probably won't get it. Second, if the landlord charges you for damage or extraordinary cleaning, she will send you a bill if your deposit doesn't cover it. If you don't pay it, she'll report it so it will appear on your credit record and/or sue you.

If you do choose to do this, I have the following recommendations. Send the landlord a letter with any partial rent payment and request that she apply your security deposit. Leave $100 to $150 of your security deposit for any minor incidental damage that has occurred. Lastly, try to schedule a walk through with the landlord prior to leaving so you can clean anything the landlord sees you've missed or make small repairs the landlord requests (such as patching nail holes).

If you choose to live out your security deposit, be aware that it does have some negative consequences that you need to watch out for.

Disclaimer
Information provided by Phil or Greg should not be construed as real estate or legal advice. State and local laws may vary, so please consult legal counsel in your area with respect to your individual situation.

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