California Security Deposit Laws in 2024: What Landlords and Tenants Need to Know

California’s rental market has seen some important updates this year, and security deposits are a big part of it. Whether you’re a landlord managing a property or a tenant renting a new place, understanding these new rules is important.

In 2024, changes to security deposit limits and protections have been introduced to make renting fairer for everyone. This guide will cover the latest updates, explain how security deposits work from start to finish, and show how Azibo can help streamline everything — from collecting deposits and rent to handling lease agreements, screening tenants, and more.

By the end of this article, you’ll have the full picture of California’s security deposit laws — and how Azibo can simplify the process for both landlords and tenants.

2024 updates to California security deposit laws

Before we discuss the full details of how security deposits work in California, let’s first explore the changes that came into effect in 2024.

California’s new rules on security deposits, implemented through Assembly Bill 12, mark a significant shift for both landlords and tenants. Starting July 1, 2024, landlords cannot charge more than one month's rent for a security deposit, whether the unit is furnished or not.

This change represents a big adjustment from previous limits, where landlords could ask for up to two months’ rent for unfurnished units and as much as three months’ rent for furnished properties.

The goal of this new law is to make renting more affordable, especially in areas where housing costs are already high. For landlords, it means revisiting their deposit policies to ensure they are in compliance, and for tenants, it reduces the upfront financial burden that often comes with securing a new rental.

Unique security deposit rules for certain landlords and tenants

There is, however, an important exception. Small landlords, defined as those who own no more than two residential properties with a total of four or fewer units, are still allowed to charge up to two months’ rent as a security deposit.

To qualify for this exception, the landlord must be an individual, part of a family trust, or an LLC made up entirely of individuals where members are natural persons. This means the property owner must hold the property as a natural person, emphasizing the distinction between individual property owners and other ownership structures.

Additionally, there’s a separate provision for tenants who are military service members. Even if the landlord qualifies for the small landlord exception, they can only charge one month’s rent as a security deposit for these tenants. This ensures that military personnel enjoy the same reduced upfront costs, regardless of who their landlord is.

Complying with the new law

For landlords who collected larger deposits before July 1, 2024, there’s no immediate need to refund the excess. However, when it comes time to return the deposit at the end of the tenancy, landlords must ensure they follow the new guidelines, including appropriate deductions and adhering to the updated timelines for returning the deposit.

The new regulations aim to create more fairness in the rental market while maintaining reasonable protections for landlords. For property owners, now is the time to review their security deposit collection practices and update any lease agreements to stay in line with these changes. Compliance is key, and staying informed will help prevent legal headaches down the road.

California security deposit law, from start to finish

As a landlord or renter in California, understanding security deposit laws is important because these regulations govern how much can be charged, how the deposit should be handled, and the timeline for its return.

Security deposit collection and holding

Under California Civil Code Section 1950.5, landlords can collect a security deposit at the start of a tenancy, which can be used to cover any damage, unpaid rent, or cleaning costs beyond ordinary wear and tear.

The deposit must be held for the tenant’s benefit and kept distinct from the landlord’s personal funds. While the statute doesn’t specify that the deposit must be held in a separate account, best practices dictate keeping tenant funds separate to ensure clarity in case of disputes.

Security deposit returns and allowable deductions

When the tenancy ends, landlords have 21 calendar days to return the tenant’s deposit, or provide an itemized statement with deductions. Allowable deductions from the deposit include the following:

1. Unpaid rent: Any remaining rent owed by the tenant can be deducted.
2. Damage beyond normal wear and tear: Landlords can deduct for damages caused by the tenant that go beyond regular wear, such as broken fixtures or excessive stains on carpets.
3. Cleaning costs: The landlord can charge for cleaning necessary to restore the unit to the same condition it was in at the start of the tenancy.
4. Replacing or restoring personal property: If allowed by the lease, the landlord may deduct for missing or damaged items like furniture, excluding normal wear.

If deductions are made, landlords must provide receipts or an itemized statement of costs. If repairs or cleanings exceed $125, landlords must provide further documentation, such as receipts or invoices.

Disputes and legal recourse

Disputes over security deposits are common in California, with many cases ending up in small claims court. According to Nolo, a large percentage of landlord-tenant disputes involve security deposits, typically when tenants feel their deposit was unfairly withheld for cleaning, repairs, or unpaid rent.

However, landlords who follow proper procedures — such as providing itemized statements, receipts, and returning deposits within the required time — can avoid these disputes.

For landlords, following California’s security deposit laws helps avoid unnecessary legal battles and fines. If a landlord wrongfully withholds a deposit, tenants may pursue legal action, potentially resulting in a judgment against the landlord for up to twice the amount of the deposit. On the other hand, proper documentation and compliance with the law provide landlords with a strong defense in case of any disputes.

Additional California security deposit laws

California enforces a few additional security deposit laws beyond restricting the total amount landlords can charge. Here's what else you need to know.

Initial inspection

Initial inspections help property managers and landlords identify damage in the rental unit and provide the tenant a chance to remedy the situation to prevent or reduce deductions from their security deposit.

In order to do so, landlords must provide the tenant with advance notice of the inspection no earlier than two weeks after the lease expires. 

Furthermore, the landlord must provide the tenant with an itemized statement of cleanings and repairs if the tenant chooses to conduct an initial inspection.

Accommodations for tenants with disabilities

Under California Civil Code Section 54.1(b)(3), landlords must make reasonable accommodations for tenants with disabilities, such as allowing modifications to the rental property to make it more accessible.

While landlords cannot request an additional security deposit solely for these modifications, they can require tenants to pay a reasonable estimate into an escrow account to cover the cost of restoring the property to its original condition once the tenant vacates.

Interest on security Deposits

In California, landlords do not have to pay interest on security deposits. However, in San Francisco, landlords must pay interest annually on deposits held over one year, regardless of what the deposit is called. The interest rate is published annually by the Rent Board in early January for the one-year period beginning March 1st.

For example, the current security deposit interest rate is 5.2% for the period March 1, 2024 through February 28, 2025. The previous security deposit interest rate was 2.3% for the period March 1, 2023 through February 29, 2024.

Landlords can pay the security deposit interest to the tenant in the form of either a direct payment or a credit against the tenant’s rent. Security Deposit interest must be paid within two weeks of the date the tenant vacates.

Tax filing obligations

If a landlord retains part or all of a security deposit for unpaid rent, damages, or other allowable expenses, that amount may need to be reported as income for tax purposes. Specifically, if the total retained exceeds $600, the landlord must issue the tenant an IRS Form 1099-MISC by January 31 of the following year.

This ensures proper compliance with federal tax laws, treating retained deposits as taxable income 

Security deposit best practices

To avoid disputes and ensure a smooth rental process, landlords and tenants should follow these security deposit best practices:

1. Clearly outline security deposit terms: In the rental agreement, clearly outline the security deposit terms, including the amount, payment method, and any conditions for return.
2. Conduct a pre-inspection: Before the tenant moves in, conduct a pre-inspection to document the rental unit’s condition. This can help prevent disputes when the tenant moves out.
3. Provide written notice: Provide the tenant with written notice of their right to request a pre-inspection before moving out.
4. Return security deposits promptly: Return the security deposit to the tenant within 21 days of move-out, along with an itemized statement explaining any deductions.
5. Keep accurate records: Keep accurate records of the security deposit, including receipts, invoices, and any correspondence with the tenant.
6. Follow California law: Familiarize yourself with California law and the new law limiting security deposits to one month’s rent, effective July 1, 2024.

By following these best practices, landlords and tenants can ensure a smooth and respectful rental process — and avoid costly disputes over security deposits.

How Azibo can help landlords with security deposits and more

Managing security deposits and complying with California’s new regulations can be complex, but Azibo simplifies the process for landlords. Whether you need to collect security deposits, manage lease agreements, or streamline rent collection, Azibo offers a comprehensive platform that handles it all.

• Secure collection and management of deposits: With Azibo, you can easily collect security deposits alongside rent payments. The platform ensures transparency by tracking all payments, helping you stay organized.
• Lease agreements and E-signatures: Azibo allows you to generate state-compliant lease agreements that are ready for electronic signatures. These leases can include essential payment terms, security deposit information, and renewal options. Once signed, all documents are securely stored within the platform for future reference.
• Automated payment reminders and rent collection: Landlords using Azibo can automate rent reminders and payment schedules, ensuring that tenants never miss a due date. This includes managing recurring fees, like parking and pet rent, as well as one-time payments, like prorated rent or security deposits.
• Document storage for compliance: While Azibo does not track specific deadlines like the 21-day requirement for returning security deposits, it offers secure storage for all important documents. This includes receipts, itemized deduction lists, and lease agreements.
• Accounting and tax reporting: For landlords concerned with tax obligations, Azibo’s accounting tools allow you to track all security deposit transactions, ensuring that any retained amounts are properly categorized for tax reporting purposes. This makes it easier to issue IRS Form 1099-MISC if necessary.

By using Azibo, landlords can manage their rental properties with confidence, knowing that everything from security deposits to lease agreements is handled efficiently and in compliance with the law.

Azibo’s core offerings are completely free for landlords, making it a cost-effective, comprehensive solution for managing your rental properties. Sign up for free today, and simplify the way you handle security deposits, rent collection, and more.

Mastering California's security deposit laws for successful tenancies

California’s 2024 security deposit laws bring important changes for both landlords and tenants. From deposit limits to requirements for returns and deductions, staying informed is key to avoiding disputes and ensuring a smooth rental experience. By understanding and applying these rules, landlords can maintain fair and positive relationships with their tenants, while tenants can better protect their rights.

To help landlords manage these processes efficiently, Azibo offers tools that streamline tasks such as collecting security deposits, managing lease agreements, and organizing important documents. With Azibo’s free platform, landlords can confidently handle their rental properties.

While staying informed about legal requirements is important, Azibo equips landlords to handle the demands of property management. Sign up for free today, and see how Azibo can simplify security deposit handling and other rental tasks.