Security deposits when you sell a rental

Selling to us doesn't require you to do any of this. We buy as is, and a title company handles the closing paperwork. This guide is only here if you want to understand the rules.

The Minnesota rule, step by step

1. Find every deposit. Dig up each lease, what was paid, and when. Your ledger has to survive questions from a tenant years from now.
2. Work out the interest. Deposits earn 1 percent simple, noncompounded interest a year. That's owed to the tenant, so it's part of what you're passing along or paying out. It adds up over a long tenancy.
3. Choose: transfer or return. Either hand it to the new owner or give it back to the tenant, by 60 days after your interest ends or when the buyer must account to the tenant, whichever comes first. A tenant moving out soon after closing can make that much sooner, so treat closing as your date. Only doing one of these relieves you of further liability.
4. Tell the tenant. If it went to the buyer, notify them of the transfer, with the buyer's name and address. Keep a copy.

On the sale, the buyer has the landlord's rights and duties for the deposit. That doesn't release you. You're relieved only once you've transferred it or returned it, so until then, plan on still owing the tenant.

Skipping this is expensive. A landlord who fails to transfer or return as required owes the withheld amount and interest as a penalty, on top of the deposit itself. Failing the rules means holding on to it is presumed to be in bad faith, unless it's returned within two weeks after a suit starts, and bad faith can add punitive damages up to $500 per deposit.

What differs in Superior

We didn't find a Wisconsin rule on how a deposit moves at a sale. The seller isn't automatically released by transferring either, so use a written closing line saying how much moved, for which tenant, and who is responsible from then on.

How it shows up at closing

That depends on your purchase agreement, so make sure it mentions deposits. Ask the title company how it will appear on the closing statement. The buyer would be taking on a duty to the tenant, and if you've spent deposits or mixed them with your own money, count them on the sell side of the keep-or-sell worksheet.

Some things worth pinning down in writing:

• Each tenant's deposit amount, and the date it was paid
• Interest owed through the closing date, in Minnesota
• Any money you've already held back, and why
• Unpaid rent or damage claims, and who gets to pursue them after closing
• Prepaid rent for the month of closing

A tenant owes you money. Can I take it from the deposit before I sell?

We didn't find a clear answer for a tenant who is staying. The Minnesota rule on withholding is framed around a tenancy ending, so ask an attorney before you deduct from a sitting tenant's deposit. What the law does say: it allows passing on the remainder after lawful deductions. You may keep only what's reasonably necessary for unpaid rent or to restore the unit, ordinary wear and tear excepted, and in a dispute the landlord has to prove the reason. Keep the numbers and tell the tenant in writing. Tell the buyer about any claim, and ask an attorney before you touch the money.

No records?

It happens, especially with a building you inherited or bought from another landlord. Ask each tenant what they paid and whether they have a receipt. Look at the old lease and at the prior owner's closing statement. Note what you did to find out, in writing. Be straight with your buyer about any gaps, since the duty to the tenant doesn't go away because the file is thin.