Updated August 16, 2026
AB 12 is a small law that owners hear about and worry about more than it deserves. Effective July 1, 2024, it capped residential security deposits at one month's rent for most California landlords, down from two months unfurnished and three months furnished. For a seller it changes almost nothing about value, and it changes one thing about the closing statement. This is a broker's plain-English explainer, not legal advice.
Security deposits are a liability, not income. They sit on the balance sheet as money the owner is holding for someone else, and they are credited to the buyer at closing because the buyer inherits the obligation to return them.
A lower cap means slightly less cash held against future damage, which marginally increases the turnover reserve a prudent operator carries. On a twelve-unit building that is a rounding difference. It is noise, not signal.
Where it has any real effect is on smaller owners, who are more likely to have relied on a two-month cushion, and on units with higher damage risk where the cushion did more work.
Deposits do move through a sale, and getting them wrong is a real irritation.
Sellers. Reconcile deposit records against the rent roll before listing. An unexplained gap between what your records say and what a tenant confirms on an estoppel is a small number that costs disproportionate credibility.
Buyers. Confirm the deposit schedule in diligence and check that the credit at closing matches the estoppels rather than the seller's summary.
Do I have to refund part of a deposit I collected before July 2024?
No. AB 12 governs what may be collected going forward. A deposit lawfully collected under the prior rules remains lawfully held.
Does the small-landlord exception apply to my LLC?
It can, where the LLC's members are all natural persons and the ownership stays within the two-property, four-unit limit. Confirm the specifics with counsel — the structure test is narrower than owners assume.
What happens to deposits when I sell?
The obligation transfers to the buyer and the amount is credited to them on the closing statement. It is not money the seller keeps.
Does a lower deposit cap hurt my building's value?
Not meaningfully. Deposits are a liability rather than income, so they do not enter the net operating income a buyer capitalises. Factor a slightly larger turnover reserve into the pro forma and move on.
AB 12 belongs in the category of laws worth knowing so you are not surprised, and not worth spending negotiating capital on. Reconcile your deposit records before you go to market, make sure the estoppels agree with them, and treat the cap itself as a pro forma footnote rather than a valuation issue.
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