Chicago Security Deposits vs. Move-In Fees

A Chicago security deposit is refundable money held to secure a tenant’s obligations. A genuine move-in fee is a separate charge, usually described as nonrefundable. The choice affects your records, cash flow, and responsibilities. For rentals covered by Chicago’s RLTO, deposits bring specific account, receipt, interest, and return requirements. Calling deposit money a fee does not settle its legal treatment. See Chicago’s deposit provision and the Illinois appellate decision in Steenes v. MAC Property Management.

For a small landlord, the right question is broader than which option is easier to collect. Can you administer the payment correctly, explain it clearly, and fund repairs if damage exceeds the money available? A fee can simplify one part of the process without paying for the next resident’s unpaid rent or a major repair.

Rules were checked October 19, 2026. This is general landlord education. Have a Chicago landlord-tenant attorney review your lease, fee structure, and any disputed deductions.

Security deposit or move-in fee: the practical difference

Think of a deposit as money you may have to give back. Your records should show a continuing obligation to the resident. A genuine fee is a charge under the agreement, with a stated purpose and treatment. It should not be described as a refundable reserve in one document and nonrefundable income in another.

Question	Security deposit	Genuine move-in fee
What is the payment for?	Security for permitted lease obligations	A separately identified charge connected to moving in
Does the tenant normally get it back?	Yes, subject to lawful deductions	Usually no, if validly agreed and lawfully structured
What must the owner track?	Principal, account records, interest, notices, and return	Agreement, disclosure, purpose, collection, and applicable fee restrictions
Does it eliminate damage risk?	No; losses may exceed the deposit	No; a fee is not a dedicated damage reserve
What is the common mistake?	Spending or mishandling tenant money	Assuming the word “nonrefundable” resolves every issue

This comparison is a planning framework, not approval of a particular charge. Additional rules can apply to subsidized units, association charges, and regulated housing. An apartment inside a condominium building may also involve a separate association payment that needs its own explanation.

Avoid combining every charge into “move-in funds.” Give the applicant a clear statement showing first rent, deposit if any, fees if any, and the party receiving each payment. A resident should understand the total before committing to the apartment.

First establish which deposit rules cover the property

Chicago’s RLTO generally excludes owner-occupied premises with six units or fewer from most of its provisions. The exclusion preserves certain other protections, including Fair Notice and anti-lockout rules. It does not mean every rental owned by a small landlord is exempt. Review the actual premises and occupancy under Section 5-12-020.

For example, owning only one rented condominium does not itself establish the owner-occupied small-building exclusion. Nor does living elsewhere in Chicago. The relevant facts include the premises, number of units, and whether the owner occupies them.

State rules still matter when the local deposit provision does not apply. The current Illinois Security Deposit Return Act regulates damage deductions and itemization. Its current text no longer contains the old five-unit threshold. Do not use an older summary to conclude that a two-flat has no deposit-return obligations.

Create a written coverage note before selecting the lease. If ownership or occupancy changes, revisit it. The Chicago RLTO compliance guide provides broader context, but the deposit procedure should identify the rules that apply to your specific rental.

Set up the deposit process before accepting money

For a covered deposit, Chicago requires an interest-bearing, federally insured account at an Illinois financial institution, separate from the landlord’s assets. The ordinance also requires bank identification in the written agreement and a receipt with specified information. Electronic payments have their own receipt provision. These duties appear in Section 5-12-080(a) and (b).

Set up the account and receipt process before asking an approved applicant to pay. A person accepting money on your behalf should know which account receives it and how the receipt reaches the resident. Avoid a process that depends on someone remembering to fix the records later.

The city’s code allows a narrow procedure for a combined first-rent and deposit payment if the deposit is transferred to a compliant separate account within five business days. That exception is not permission to leave tenant money in an operating account indefinitely. Use the actual subsection when designing the process.

A useful internal deposit register includes the tenant and unit, amount, collection date, rental period, financial institution, receipt location, and interest-payment history. Include a link to the signed agreement and any account-change notices.

Reconcile that register to the bank records regularly. If the total obligations to tenants exceed the funds available, investigate immediately. A spreadsheet balance is not proof that the corresponding money remains in the account.

When a manager collects the deposit, confirm who issues receipts, maintains records, calculates interest, and approves refunds. Put those responsibilities in the management agreement. Compare the administrative services in our Chicago property management fees guide rather than assuming every management package includes them.

Handle interest as a scheduled obligation

For covered tenancies, Chicago requires interest on deposits and prepaid rent held longer than six months. The annual payment or rent credit is generally due within 30 days after each twelve-month rental period. The applicable rate is tied to the agreement and renewal rules, not simply the return paid by your bank. See Section 5-12-080(c) and the city’s rate-setting provision.

Use the City of Chicago’s current official materials when selecting a rate. Do not substitute a statewide rate or an old figure embedded in your accounting software. The city’s renters’ rights resources connect to its ordinance and deposit-interest information.

Here is a hypothetical arithmetic example, not a statement of the current city rate. If a $2,000 balance earns a legally applicable annual rate of 0.10%, a full year’s simple calculation is $2,000 multiplied by 0.001, or $2. The percentage must be converted correctly before multiplying.

The amount may be small, but the record should still be clear. Show the rental period, balance, rate, calculation, payment date, and whether the resident received cash or a rent credit. A credit should appear distinctly in the ledger rather than disappearing into a miscellaneous adjustment.

Use separate reminders for annual interest and final deposit return. A resident renewing for another year may need an interest payment even though no move-out is occurring. Replacing the lease document should not erase the deposit history.

Keep required summaries with the lease packet. Section 5-12-170 addresses the ordinance and deposit-interest summaries. Save the version provided with each new agreement or renewal so you can establish what the resident received.

Separate the 30-day itemization from the 45-day refund

For RLTO-covered tenancies, the general deadline to return the deposit balance and required interest is 45 days after the tenant vacates. If claiming property damage, the landlord must provide an itemized statement within 30 days. Estimated costs require follow-up documentation. Certain casualty-related terminations have a separate seven-day return rule. These are distinct duties under Section 5-12-080(d).

Do not turn those rules into a single reminder labeled “deposit due in a month.” Schedule the inspection, contractor assessment, itemization, supporting receipts, and refund as separate tasks. Review the particular termination if it does not follow an ordinary move-out.

For illustration, assume an ordinary covered move-out on June 30, 2027. Thirty calendar days later is July 30; forty-five days later is August 14. Those arithmetic reference points help show the gap between the two duties. Confirm legal deadline counting and delivery requirements for the actual file, and finish early enough to handle problems.

Request a forwarding address and save the resident’s response. Keep the address used, the document sent, and delivery evidence. A manager should be able to locate these records without searching a former employee’s personal messages.

An unpaid contractor invoice should trigger an early review of what documentation the law permits. It should not cause the file to sit untouched beyond a deadline. Obtain estimates promptly and track the final documents separately.

Decide deductions from evidence, not the turnover budget

Chicago permits qualifying unpaid-rent deductions and reasonable amounts to repair tenant-caused damage, excluding reasonable wear and tear. That distinction comes from the deposit statute’s deduction rules. The existence of a deposit does not make the resident responsible for every expense needed to prepare the apartment for a new lease.

Compare move-in and move-out records before assigning a cost. Photographs should identify the room and condition, with dates where possible. A checklist saying “good” for every room offers less help than records showing a preexisting stain, repaired cabinet, or worn floor.

Separate maintenance, upgrades, and claimed damage in the work order. If you planned to replace an old countertop regardless of the tenant’s conduct, do not automatically place the entire renovation invoice in the deduction column.

A good deduction record explains the condition, why it differs from the original record, the repair performed, and the cost supported by receipts. Avoid vague descriptions such as “unit reset” or “general damage.” Those descriptions do not help the tenant understand the claim.

Consider a hypothetical $1,800 deposit. Assume a properly supported, legally permissible $240 repair and $100 of unpaid rent that may lawfully be deducted. The principal balance would be $1,460 before adding any interest still due. If the repair cannot be substantiated, the arithmetic alone does not make that deduction valid.

Review disagreements on their facts. A resident who disputes one item may agree about another. Keep the discussion focused on the records and avoid using the deposit to settle unrelated frustrations about the tenancy.

Penalties require careful reading

Chicago’s deposit provision can expose a landlord to damages equal to twice the deposit plus statutory interest. It contains a narrow process for certain deficient-interest payments that were made within the required period. That process is not a general cure for every account, receipt, or return violation. Read Section 5-12-080(f) before assuming a late correction eliminates liability.

If you receive a demand, preserve the records and get advice promptly. Do not delete a ledger entry, backdate a receipt, or promise that a small payment necessarily resolves the matter. A written resolution should accurately state what the parties agreed.

For management purposes, treat an error as a signal to review similar files. If the software used the wrong rate for one resident, check whether the same setting affected others. Correcting the process can prevent a repeated problem, even when the first dispute requires separate legal work.

A move-in fee needs a genuine purpose and clear terms

In Steenes v. MAC Property Management, an Illinois appellate court upheld treatment of a particular nonrefundable move-in fee as distinct from a security deposit. The court examined the actual arrangement. That decision does not establish that every payment labeled “move-in fee” is valid or that a universal percentage automatically makes a fee lawful.

Have the lease and payment instructions describe the same transaction. If your staff tells applicants “you get it back if nothing is damaged,” do not expect a nonrefundable label elsewhere to remove the resulting question.

Distinguish your fee from an association’s charge when renting a condominium. Identify who imposes it, who receives it, and what supporting documents explain it. Review whether you may pass it through rather than assuming an association invoice creates an automatic tenant obligation.

Give the applicant the total move-in cost before requesting payment. If the fee changes while the application is pending, stop and correct the disclosure before collecting it. Surprises create distrust and complicate the record of what was agreed.

A fee also does not replace screening or property inspection. Use a consistent Chicago tenant screening process, document the condition at turnover, and maintain an owner-funded reserve. Collecting a fee is not a guarantee that later losses will be covered.

Prepare for Illinois fee rules taking effect in 2027

Illinois enacted Public Act 104-0479 in 2026. Public Act 104-0514 moved its effective date from July 1, 2026, to January 1, 2027. As of this article’s October 19, 2026 review, those new requirements are enacted but not yet effective.

The enacted law requires mandatory fees to appear on the first lease page and addresses disclosure in listings or an accompanying link. It bans specified charges, including renewal fees. Its $50 application-fee rule has a limited actual-cost exception for third-party background checks. It applies to covered residential agreements entered into after its effective date and excludes owner-occupied premises with six units or fewer. Review the final public act, rather than an early bill summary.

For a deposit-versus-fee decision, prepare a line-by-line inventory now. List each charge, its purpose, whether it is mandatory, where it is disclosed, and who receives it. Ask counsel to review the final statute against that inventory before using the next lease form.

Do not assume a new name makes a prohibited charge collectible. Likewise, do not describe every move-in fee as prohibited simply because a legislative proposal once discussed broader restrictions. The enacted text and its effective date control the review.

Coordinate this work with the Chicago rent increase process. A revised fee schedule is not permission to add charges during an existing fixed lease. Lease timing, notice, and the new statute’s applicability need to be considered together.

Compare the economics without counting deposits as income

Consider two hypothetical arrangements for an apartment renting at $1,800. Option A requires first rent plus a $1,800 refundable deposit. Option B requires first rent plus a $500 fee that counsel has confirmed is lawful for the agreement. These are examples, not recommended Chicago amounts.

The initial cash required would be $3,600 under Option A and $2,300 under Option B. That difference affects an applicant’s ability to move. It does not mean the landlord earns an extra $1,800 under the deposit approach: that money remains subject to repayment and deposit rules.

Under the fee approach, test a hypothetical $1,200 damage event. The $500 charge does not make the repair cost disappear. If it was already spent on legitimate move-in work or administration, it is not available as a dedicated repair reserve.

Build your budget from rent, actual operating expenses, expected turnover, and owner reserves. Keep refundable tenant funds separate from money available for a roof, furnace, or loan payment. Ask your accountant how each payment should be recorded.

For voucher or other assisted housing, verify the program’s deposit and fee rules before applying either model. The Chicago Section 8 landlord guide explains why program documents and agency requirements need their own review.

Reconcile inherited deposits before buying a rental

A building purchase can transfer deposit obligations along with the tenancies. The Illinois Security Deposit Return Act addresses successor liability, and Chicago has additional transfer requirements for covered deposits. Have the closing team reconcile those duties rather than relying only on a total credit on the settlement statement.

Ask for a tenant-by-tenant schedule, agreements, receipts, balances, interest history, and bank records supporting the deposits. Compare the schedule with the rent roll and tenant confirmations. A line marked “deposit: none” should be investigated if a lease says the tenant paid one.

Assign responsibility for transfer notices and follow through after closing. Preserve copies of what the seller provided and identify any unresolved difference. Paying the seller a purchase price does not answer whether a resident’s deposit was properly accounted for.

Choose a policy your team can follow

Select the payment structure only after reviewing coverage, lease terms, program restrictions, and the applicable dates. Then make the procedure simple enough that it works during a busy leasing season.

• State exactly what each payment is for before collecting it.
• Use an attorney-reviewed agreement that matches the payment instructions.
• Assign deposit accounts, receipts, interest, and notices to named people.
• Preserve inspection records and itemize supported deductions.
• Calendar the return and documentation duties separately.
• Review inherited balances and upcoming fee-law changes.
• Maintain an owner reserve that does not depend on refundable tenant money.

For a self-managed two-flat, this may be a disciplined register and a calendar. For a larger portfolio, software can help, but someone still needs to verify the settings and records. The best policy is one you can explain accurately to a tenant and carry out consistently from application through move-out.

Sources and review date

Primary materials checked October 19, 2026: Chicago Municipal Code deposit requirements, RLTO exclusions, interest-rate provisions, and required summaries; the Illinois Security Deposit Return Act; Steenes; and Public Acts 104-0479 and 104-0514. Dollar amounts and interest arithmetic labeled hypothetical are illustrations, not market averages or the announced city rate.