2025 Security Deposit Guidance for California Landlords

Almost a year into the implementation of California’s new security deposit cap, questions remain about what landlords can and cannot collect. This guidance outlines how to stay compliant with state law, particularly when structuring new tenancies under Civil Code section 1950.5, as amended by AB 12 (2023).

What Changed in 2024

Effective July 1, 2024, California law limits the amount a landlord may collect as a security deposit to no more than one month’s rent for most residential rental agreements.

This change applies to all new tenancies, regardless of whether the unit is furnished or unfurnished.

Civil Code § 1950.5(c), as amended by AB 12:
"A landlord shall not demand or receive security, however denominated, in an amount or value in excess of an amount equal to one month’s rent, in addition to any rent for the first month paid on or before initial occupancy."

This rule does not apply to tenancies that began before July 1, 2024.

Exception for Small Landlords

A limited exception allows qualifying “small landlords” to collect up to two months’ rent as a security deposit. To qualify, all of the following must be true:

• The landlord is a natural person, or an LLC in which all members are natural persons

• The landlord owns no more than two residential rental properties in California

• Those properties contain a combined total of no more than four units

AB 12 (2023):
"This subdivision shall not apply to a landlord who is a natural person or a limited liability company in which all members are natural persons, who owns no more than two residential rental properties that collectively include no more than four units offered for rent."

Note: Properties held in trust, by corporations, or by non-natural-person entities are not eligible for this exception.

Important: Even if the owner qualifies under this exception, California law prohibits collecting more than one month’s rent as a deposit from an active-duty service member. This applies regardless of the number of properties the landlord owns.

“Last Month’s Rent” and Prepaid Rent: Strict Rules Apply

Under current law, you may not simply label an additional charge “last month’s rent” to collect more than the permitted deposit. Unless that amount qualifies as lawful prepaid rent, it will likely be treated as a security deposit and counted toward the cap.

Civil Code § 1950.5(c):
"The term 'security' means any payment, fee, deposit or charge, including, but not limited to, an advance payment of rent... that is imposed at the beginning of the tenancy to be used to reimburse the landlord..."

To avoid classification as a deposit, any prepaid rent must:

1. Cover at least six months of rent in advance

2. Be documented in the lease or an addendum as nonrefundable advance rent, not a deposit

3. Be supported by a rent receipt confirming that the amount is for prepaid rent

Simply collecting an extra month labeled “last month’s rent,” without these elements, will not meet the legal definition and will be treated as a deposit.

But What If the Tenant Breaks the Lease?

Even if prepaid rent is appropriately structured and labeled as non-refundable, that does not automatically allow the landlord to keep it if the tenant moves out before the end of the lease. Under California law, landlords have a duty to mitigate damages by making reasonable efforts to re-rent the unit.

In practical terms:

• If a tenant prepays six months of rent and vacates after two months, the landlord must attempt to re-rent the unit as soon as possible

• If the unit is re-rented one month after the tenant leaves, the landlord may only retain prepaid rent for the three months the unit was unoccupied

• Any unearned portion of prepaid rent must be returned to the tenant unless the lease includes a valid liquidated damages clause and the terms comply with California contract law

Prepaid rent may be described in the lease as non-refundable, but that label does not override the landlord’s obligation to mitigate losses or comply with California's general rules on contract damages. Courts are unlikely to uphold a forfeiture of unearned rent simply because the lease called it non-refundable.

It is also important to understand that prepaid rent is not a security deposit. These funds cannot be used to cover cleaning, damage, or other costs at move-out. Prepaid rent may only be applied to unpaid rent. If the tenant vacates early and causes damage, the landlord must pursue a separate claim for those costs. Prepaid rent cannot be diverted to cover non-rent charges.

Can You Split the Cap?

If you qualify as a small landlord and are allowed to collect two months’ rent total, you cannot bypass the rules by collecting one month as a deposit and one month as “last month’s rent” unless the latter qualifies as legitimate prepaid rent.

Otherwise, the entire amount is treated as a deposit under Civil Code § 1950.5(c) and you risk collecting more than the law allows.

State and Local Laws Apply

Landlords must comply with both state law and any applicable local ordinances. In Berkeley, this means observing the following:

• Annual interest on security deposits is required for rent-controlled and partially covered units. The Berkeley Rent Stabilization Board sets the interest rate and payment rules (BMC § 13.76.070, Rent Board Regulation 704);

• Under California Civil Code § 1950.5, once a lease begins, the security deposit amount may not be increased, even if rent increases or new tenants are added;

• Deposits must be returned within 21 calendar days of move-out, accompanied by an itemized statement, photographic documentation, and any receipts or invoices supporting deductions.

Tips for Compliance

• Do not collect a separate “last month’s rent” unless you are collecting six months or more of prepaid rent and meeting all statutory requirements.

• Do not assume that your lease language overrides the statute. If the payment does not meet the legal definition, it will be treated as a deposit regardless of how it is labeled.

• Do not exceed the cap under the assumption that a portion of the funds is “nonrefundable” unless you can lawfully document it as advance rent.

• Always provide a lease or addendum, along with a receipt that clearly distinguishes between the deposit and prepaid rent.

Legal References

• California Civil Code § 1950.5 (Amended 2023)

• AB 12 (2023), Stats. 2023, ch. 130

Mislabeling Puts You at Risk

Landlords may not rely on waiver clauses or have tenants sign a form stating that a refundable deposit is “prepaid rent” unless it meets the definition described above.

Even a signed agreement may be void if it attempts to waive the protections of Civil Code § 1950.5. Mislabeling a deposit could result in financial penalties and legal exposure.

If you are considering collecting prepaid rent beyond the first month and are unsure whether it meets the legal requirements under Civil Code § 1950.5, consult qualified legal counsel before proceeding. Misclassification can result in noncompliance with the state deposit cap.