Renting out property in Illinois is a competitive and lucrative opportunity for landlords, especially in suburban areas like those surrounding Chicago. According to a recent report from Business Insider, suburban Chicago now ranks as the second-most competitive rental market in the country. With such high demand, landlords may feel they have the upper hand. However, that doesn’t mean compliance with tenant rights and property laws can be overlooked—particularly when it comes to security deposits.
Security deposits are a critical component of protecting your investment, but they also come with strict rules that landlords must follow. Whether you're a seasoned property owner or just entering the rental market, understanding Illinois’ regulations can save you time, money, and legal trouble.
In this guide, we’ll walk you through the essentials of:
How much to charge for security deposits
How to legally store and manage deposits
When and how to return or deduct from deposits
Let’s explore what Illinois landlords need to know to stay compliant and attract reliable tenants.
Key Takeaways
Illinois allows landlords to set their own security deposit amounts, but best practices suggest no more than two months' rent.
Deposits must be stored in a federally insured interest-bearing account, with no co-mingling of funds.
Landlords have 30 days to notify tenants of deductions and 45 days to return deposits with interest.
Deductions must be itemized and reflect actual damages, not normal wear and tear.
Partnering with a property management company can ensure compliance and simplify security deposit handling.
How Much Should Security Deposits Cost?
Illinois law does not cap the amount a landlord can charge for a security deposit, leaving it up to the landlord’s discretion. While this flexibility can be beneficial, charging too much can deter potential renters. In highly competitive markets like suburban Chicago, setting a reasonable deposit is key to attracting applicants.
Most Illinois landlords stick to charging one month’s rent as a security deposit. In some cases, two months may be acceptable, particularly for luxury units or applicants with low credit scores. However, anything beyond that may limit your applicant pool.
Tip: Consider offering alternatives like security deposit insurance or small monthly security fees for applicants who can’t afford a large upfront cost. This can increase accessibility while still protecting your property.
How Should Illinois Landlords Manage Security Deposits?
Once you’ve collected a security deposit, Illinois law requires you to handle it in specific ways:
Store the deposit in a federally insured, interest-bearing account.
Do not combine tenant deposits with your personal or business assets.
Notify tenants if the account holding their deposit changes.
If you own a rental property in Chicago, note that additional city-specific regulations apply. For instance, interest must be paid on security deposits held for more than six months, and the city sets a new interest rate annually. In 2025, the interest rate is 0.01%.
Pro Tip: Maintain documentation for every deposit. Keep account numbers, bank information, and a record of the interest rate to avoid legal disputes.
What Warrants a Security Deposit Deduction?
Landlords in Illinois can’t deduct from a security deposit arbitrarily. A deposit is refundable unless the tenant fails to meet their lease obligations. Valid reasons to withhold or deduct from a deposit include:
Unpaid rent or utilities
Damage beyond normal wear and tear (e.g., broken fixtures, large stains, holes in walls)
Breach of lease agreements (like unauthorized pets or smoking)
Importantly, deductions must match the actual cost of the repairs. For example, if replacing a broken window costs $200, you can’t deduct $500.
Not Allowed: Charging for routine carpet cleaning or repainting due to minor scuff marks would generally not qualify unless the damage is excessive.
When Should You Return or Withhold a Security Deposit?
After a tenant vacates the rental unit, Illinois law gives landlords:
30 days to send a notice of any damage that will lead to a deduction
45 days to return the deposit (or remainder) along with interest
If you're withholding funds, you must provide an itemized list detailing:
The type of damage
Cost of repairs
Supporting documentation (receipts, invoices, photos)
Failing to follow this process can result in the tenant taking legal action, including seeking double the deposit amount in damages if the landlord is found at fault.
Best Practices for Landlords
To streamline your process and minimize legal risk:
Conduct a thorough move-in and move-out inspection with photo documentation
Use a checklist signed by both parties to verify the property's condition
Clearly outline your deposit policy in the lease agreement
Communicate with tenants before and after their move to avoid disputes
These best practices show professionalism and build tenant trust—something that’s especially important in a tight rental market.
FAQs About Security Deposits in Illinois
How soon after a lease ends should landlords return deposits?
You have 45 days from the date the tenant moves out to return the deposit or issue an itemized deduction notice.
Do landlords have to pay interest on security deposits?
Yes, if the property is located in Chicago or another municipality with specific interest laws. The current Chicago interest rate is 0.01%.
Can I charge a non-refundable deposit instead?
No. Deposits are refundable by definition. If you want to collect a non-refundable payment, such as a pet fee or cleaning fee, it must be labeled as a fee, not a deposit.
What’s the difference between wear and tear vs. damage?
Wear and tear: Small nail holes, light scuffs, faded paint
Damage: Broken doors, large stains, cigarette burns, smashed appliances
What happens if I miss the deposit return deadline?
Tenants may take you to small claims court, and you could be liable for twice the deposit amount, plus legal fees.
Cruise Property Management: Legal Compliance Made Simple
Staying compliant with Illinois’ ever-changing landlord-tenant laws takes more than good intentions. With stiff penalties for security deposit violations, even experienced landlords can find themselves in legal hot water.
At Cruise Property Management, we help landlords stay protected while maximizing rental income. From setting the right deposit policies to handling funds and documentation with precision, we handle the complexities for you.
If you're ready to take the stress out of property management, contact our team today. We're here to help you protect your investments and keep your tenants happy—all while staying 100% compliant.
