Security Deposits When You Buy an Apartment Building: Who Owes Them and How They Transfer
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When you buy an apartment building, you usually become responsible for returning each tenant's security deposit when they move out, even though the seller collected the money. Most states make the new owner liable for deposits from the day it takes title. In Texas, for example, Property Code section 92.105 makes the new owner liable from the date title is acquired, requires the new owner to give each tenant a signed statement acknowledging responsibility for the deposit and stating its exact amount, and keeps the former owner liable until the new owner has received the deposit or assumed the liability. At closing, the seller normally credits the buyer with the total of all deposits on the settlement statement. The buyer's job is to make sure that number is right before closing.
This guide covers how deposits transfer, how to verify them and what to do after closing. It fits with closing day funds flow and the first 90 days after closing.
How do deposits transfer at closing?
The usual approach:
- The seller's rent roll lists each unit's deposit.
- The purchase contract says the seller will credit the buyer with all tenant deposits (and sometimes prepaid rents) at closing.
- The settlement statement shows a credit to the buyer for the total, which reduces the cash the buyer brings.
- After closing, the deal company holds that amount (in its operating account or a separate deposit account, depending on state law) and is responsible for each refund.
Pet deposits, key or amenity deposits and last month's rent may be treated differently by state law. List each type separately in the contract.
How do you verify the amounts?
- Rent roll vs. leases. Compare the deposit on the rent roll to the deposit in each lease. A lease audit catches mismatches.
- Tenant estoppels. Ask tenants to confirm their deposit amount in estoppel certificates. Tenant-confirmed amounts are the best evidence.
- Ledger. Ask for the deposit ledger and the bank statement of any separate deposit account.
- Missing deposits. If a tenant says they paid a deposit the seller does not show, raise it before closing and get a credit or an indemnity.
What do states require?
Rules vary, so check the property's state. Common themes:
- Successor liability. The new owner is liable for returning deposits, as in Texas.
- Notice to tenants. Some states require the new owner (or the seller) to tell tenants about the transfer and the deposit amount.
- Where deposits are held. Some states require a separate account or a trust account, sometimes interest-bearing, and notice to tenants of the bank.
- Return deadlines and itemized deductions. The rules on how quickly to return a deposit after move-out, and what to itemize, apply to the new owner.
Ask your closing attorney for the state's checklist, and make sure your property manager updates its forms.
After closing
- Record each tenant's deposit in the deal company's books and the property manager's system.
- Send tenants any required notice of the new owner and their deposit.
- Move deposits to a compliant account if the state requires one.
- Track move-outs so refunds are on time, since late or missing itemizations can bring penalties.
How DoorRaise fits in
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FAQ
Does the buyer get the deposit money in cash?
Usually the seller gives a credit on the settlement statement, which lowers the cash the buyer brings to closing. The buyer then funds refunds from its own accounts.
Can a new owner refuse to refund a deposit the seller never transferred?
Generally not, where the state makes the new owner liable. The buyer's remedy is against the seller under the purchase contract, which is why verifying deposits before closing matters.
Are security deposits income?
Refundable deposits are generally not rental income when received, but deposits applied to rent or damages become income when applied. Ask your CPA.
Do deposits affect how much equity we raise?
Indirectly. The deposit credit lowers cash needed at closing, but the deal also takes on the liability to refund it. Many sponsors keep cash equal to deposits in reserve.
Next step: see what else changes hands at closing in closing day funds flow.
Sources
- Texas Property Code section 92.105, cessation of owner's interest
- IRS Publication 527, Residential Rental Property (security deposits)
This article is general information, not legal or tax advice. Security deposit law varies by state and city. Talk to a local real estate attorney about your property. DoorRaise is not a law firm, broker-dealer, investment adviser or funding portal.