Should we give back the security deposit?

I know, I know, the title is a bit evil-sounding. but I needed to get your attention somehow, right? We are dealing with the question of refunding the security deposit, but not in the way you are thinking.

As I wrote in my last post, one of our tenants is moving out earlier than we expected. Their first year ends on June 1st, but they intend to stay until the end of June. This creates a conundrum for us on how to deal with a security deposit.

Section § 55-248.15:1 of Virginia law states that interest has to be paid on a security deposit "...at an annual rate equal to one percentage point below the Federal Reserve Board discount rate as of January 1 of each year." Doing some research, we discover that the discount rate (referred to as the "primary rate") was 6.25% on January 1st, 2007. On January 1st, 2006 the discount rate was 5.25%.

So that means that we have to pay 4.25% interest on their deposit for 7 months, and 5.25% interest on their deposit for 6 months. So where's the dilemma, you ask?

Virginia law happens to give us an "out" for the interest problem. "...no interest shall be due and payable unless the security deposit has been held by the landlord for a period exceeding 13 months after the effective date of the rental agreement...". The dilemma presents itself. If we refund their security deposit before July 1st, then we do not have to pay any interest on it. However, since they intend to stay to the end of June, this essentially means refunding the deposit before they move out.

We accepted a security deposit of $800, and doing some quick math we see that if we ended up paying interest, we'd owe them about $841.35 (depending on the day we pay them back). So the difference between our two options is just over $40 (about a month's worth of interest from our savings account).

In this situation, we've decided that holding on to the deposit until we've had a chance to check out the property is worth $40. Even though we have no expectations of finding something wrong (they've offered to steam clean the carpets for us, free-of-charge), it's the safer choice.

Even though $40 doesn't sound like much, good businessmen know that very dollar is important to us (which is why we track them all so closely). We're not stingy, and know that the money spent on air-conditioning repairs will pay itself back through happy tenants and better maintained equipment. But every dollar we spend should have a purpose, and every purpose should be carefully considered. Since this is the first time we've had to deal with this issue, it makes sense to discuss it in depth. In the future, we have precedence to build on.