The Tenants Left The House a Mess When They Left.
Q1
A tenant in one of my units vacated as scheduled but left the place a mess. In addition to not doing any cleaning, the carpet is seriously stained and otherwise damaged in several spots, walls and blinds have damages. I have a non-refundable cleaning deposit in addition to a security deposit. What can I charge the ex-tenant against his deposits?
A1
Some states do not allow a separate cleaning deposit and some states prohibit making it non-refundable. Technically, any
“deposit” is by definition potentially refundable if the tenant meets the terms of the lease agreement. In states where a non-refundable amount is allowed, it should be called a “fee” rather than a “deposit.” Finally, some states that allow other than a “security deposit” still limit the maximum total of all amounts collected to the maximum amount for a security deposit. For example, in some states a “cleaning fee” of $200 plus a “security deposit” equal to two months rent would exceed the legal limit if state law limits a security deposit to two months rent. I mention these potential issues because a knowledgeable tenant could use collection of excess deposits against the landlord when disputing the deductions taken from his deposits.
I will assume that a cleaning deposit/fee is allowed in your state and that it can be non-refundable. I will also assume that his rent was paid to the date of vacating, as you made no mention of rent being owed. If both rent and damages are owed it can sometimes be important regarding the order in which deductions are taken from amounts held by the landlord.
In your case and under my assumptions you should apply all cleaning costs against the cleaning deposit/fee amount. In some states, if the amount of the cleaning deposit exceeds the cost of cleaning (as the term is generally understood) the excess cannot necessarily be applied against damages that are not considered cleaning and the excess of the “deposit” must
be refunded to the tenant. This fact is another reason to call the amount collected for cleaned a cleaning “fee” rather than a cleaning “deposit” when such a fee is allowed by the particular state.
If the entire cleaning amount collected is not enough to cover all cleaning costs, the excess cost would next be applied against the security deposit.
Actual damages, including carpet and blinds, but not including “normal wear & tear” would then be charged against the remainder of the security deposit. Damages in excess of the remaining deposit amount may be recoverable via a lawsuit.
It is important to understand that you cannot charge the tenant for the total cost of replacing the entire carpet in the unit. There are two different issues regarding this issue. First, depending on the floor plan and the location of carpeting, it may be acceptable to replace carpeting in only certain rooms. Second, wherever carpeting is replaced you cannot charge for the full cost of carpeting, but must allow for depreciation.
The percentage of cost of replacing damaged carpet that may be charged against the tenant is determined by dividing the number of years the carpet has been in service (including the period the unit was occupied by the tenant who damaged the carpet) by the useful life of the carpet. There is more than one number that might be justifiable for useful life, but it is usually least arguable to use the number of years warranted by the manufacturer.
As examples, assume a carpet that the manufacturer had warranted for 15 years. If the carpet was 10 years old when the tenant vacated the unit, the tenant can be charged 5/15 = 33.3% of the replacement cost. If the carpet had been new when the tenant moved in a year earlier, the tenant can be charged 14/15 = 93.3% of replacement cost. If the carpet was 14 years old when the tenant moved into the unit and the tenant remained for one year or more, the tenant cannot be charged any part of the cost
of replacement.
Similar considerations must be given to window coverings, appliances, and other components of a rental that would be considered capital items (have a typical useful life of longer than a year) when they require replacement rather than repair.
Charges for damages to painted surfaces can depend on a number of factors, including specific terms of the lease agreement
and that the “damages” are actually “normal wear & tear.”
Landlords should not try to charge a tenant for replacement when a repair can fix the problem. When charges for damages end
up in court the judge is usually concerned that the landlord was fair and reasonable.
Finally, to avoid penalties that are potentially significant in some states, landlords should always provide detailed accounting (including documentation) of charges against deposits and do so within the period allowed by state law for return of deposits and/or an accounting of amounts not returned.
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Q2
I have heard that there is a method of depreciating rental property that provides for greater tax deductions than those typically used by real estate investors. Can you provide some info about it?
A2
You are likely referring to a depreciation method often called “component depreciation.” One can usually increase the amount of depreciation in the early years of ownership by depreciating individual components of an improvement rather than the total value of the improvements which is the cost of the property less value of the land. This is also often referred to as “cost segregation depreciation.”
This method is an accelerated depreciation method, as it results in significantly greater total depreciation in the early years because many components and other improvements are depreciated over a shorter period than the life allowed for the overall improvement, 27.5 years for residential property and 39 years for commercial property. There is, of course, less total depreciation available in later years after many of the shorter-life components have been fully depreciated.
However, although the procedure is simple in theory, utilizing it requires adequate knowledge of component costs as well as consideration of accrued depreciation if not new construction. Accordingly unless the subject property is new construction for which an accurate breakdown of costs is sometimes readily available, determination of the depreciation schedule is usually best done by qualified experts so as to minimize the chance of disputes with the IRS in the event of an audit. The cost of such expertise can offset any benefit from the method, particularly for smaller properties that are not new construction. In addition to the cost of setting up the method, with hundreds of separate items, there will almost certainly be higher accounting and tax return reparation
costs both in the first year and throughout the period of ownership.
One must also remember that upon sale of a property for which depreciation has been taken the seller must pay a “recapture” tax on the depreciation previously taken.
Accordingly, whether this method provides significant benefit considering the setup costs depends on the type of property, type of construction, period of ownership, federal/state tax rates during the period of ownership and the recapture rate
at the time of sale, and the tax bracket of the owner during the period of ownership and at the time of sale.
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Q3
I have heard differing opinions on whether it is best to use a verbal or a written lease.
A3
When discussing agreements, many often mistakenly use the term “verbal” to indicate that the agreement is not written.
However, “verbal” technically means expressed in “words” rather than implied by conduct. Accordingly, “verbal” can refer to either spoken or written words. The correct term for referring to spoken (not written) is “oral.” So, agreements are either oral or written.
In general, contracts of almost any kind can be either oral or written and each can be equally valid and enforceable no matter what the legal purpose or dollar amount involved. However, most states have Statute of Frauds (SOF) laws and these laws are fairly uniform among the states. Among other things, SOF laws require that contracts related to most real estate transactions be in writing. As examples, contracts to list real estate for sale or lease with a broker must be in writing to be enforceable in Court and “oral” contracts for those purposes are worthless. This is usually so even though there might be indisputable non-written evidence as to the contracts, for example, unrelated third party witnesses. Many states specify certain items that must be included in such contracts.
Statute of Frauds laws of most states require that a lease of real estate for a term of more than one year be in writing. An oral lease for a term of one year or less is binding and will be enforceable regarding most terms normally found in a lease.
However, as for any type of oral contract, oral leases regularly cause problems for both landlords and tenants because it is often difficult to determine what the terms of the lease are. This can be the result of a number of factors, including the following:
- Misunderstandings by either party at inception of the agreement,
- Misremembering or forgetting terms later by either party,
- Purposeful distortion of terms by one party or the other, and/or
- Limited or no ways of proving the lease terms if there is a dispute.
When an oral lease ends up in court, the judge can sometimes make a reasonable decision based on circumstantial evidence. For example, if the disagreement between landlord and tenant related to the amount of rent, cancelled checks or receipts would prove what the rent was for those past months. However, it would usually not support or deny any rent increase.
Sometimes a judge makes the decision based on which party can provide the best circumstantial evidence whether or not that
evidence is directly relevant to the disputed issue. However, when there is no clear evidence of who might be telling the truth he may make a decision based on who was the best liar. If both parties are equally believable or equally unbelievable, the decision is most likely to be in favor of the tenant.
Judges sometimes will not enforce certain terms of an oral lease. Non-typical lease terms will likely not be enforced. Even certain typical terms may not be enforced. For example, it is not uncommon that a judge will refuse to enforce a late penalty provision that is not in writing.
A month-to-month oral lease can continue for many years so long as it remains a month-to-month lease or a lease for a term
of no longer than one year and an oral lease can be amended orally.
The bottom line is that oral leases are only as good as the paper they are written on.