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- Civil Code section 1950.5 gives you two choices at a sale: transfer each remaining deposit to the buyer and notify the tenant, or return it to the tenant.
- If you do neither, the buyer is jointly and severally liable with you for repaying the deposit.
- Rent for the closing month, prepaid rent and the deposits are settled in escrow as of the closing date your contract sets.
- After closing, the buyer has 15 days under Civil Code section 1962 to give tenants its contact and rent payment details, and 45 days to register RSO units with LAHD.
Two ways to handle each deposit
When your interest in a rental property ends, whether by sale, assignment, death, the appointment of a receiver or otherwise, Civil Code section 1950.5 requires you to do one of two things within a reasonable time. Either one relieves you of further liability for the deposit.
- Transfer the part of each deposit that remains after any lawful deductions to the buyer, and then notify the tenant.
- Return the remaining deposit to the tenant.
In a sale of an occupied building, escrow can carry out the first option as a credit to the buyer rather than a separate payment. The notice to each tenant then goes by personal delivery or first-class mail, postage prepaid, and it states:
- that the deposit was transferred
- any claims made against the deposit
- the amount of the deposit
- the names, addresses and phone numbers of the buyer or buyers
Prepare these notices before closing and send them the day escrow closes, so tenants learn right away who now holds their money.
What happens if the deposits are not handled
If you skip those steps, the buyer becomes jointly and severally liable with you for repaying the deposit the tenant is owed. A buyer therefore has every reason to insist on a list of every deposit and a credit for the total at closing, and no reason to accept a promise that you will sort it out later.
Deductions need a decision before closing. If a tenant owes for damage or unpaid rent, you and the buyer have to agree whether you take a lawful deduction now and report it in the notice, or leave the full deposit with the buyer and settle the claim between yourselves. Whether a particular deduction is lawful is a legal question. Take it to an attorney, since Shaya is a real estate agent and not a lawyer.
Deposit rules the buyer inherits
Three recent laws change what should travel with the deposits, because the buyer is the one who will return them.
| Law | What it does | What to give the buyer |
|---|---|---|
| AB 12 | From July 1, 2024, caps a deposit at one month's rent, with a narrow exception for small owners. The cap does not apply to deposits collected or demanded before that date. | A schedule showing when each deposit was collected, so a larger deposit from an older tenancy is not mistaken for a violation. |
| AB 2801 | For tenancies that began on or after July 1, 2025, requires photos of the unit at or just before move-in. Since April 1, 2025, it also requires photos after the tenant leaves and before repairs or cleaning charged to the deposit, and again once that work is done. | The move-in photos for every tenancy that began on or after July 1, 2025. |
| AB 414 | Signed by the Governor on October 6, 2025. It has the landlord return a deposit by personal delivery or by check payable to the tenant, or electronically if the landlord received the rent or the deposit electronically, unless the two agreed in writing on another method. | A record of how each tenant pays rent, and any written agreement about how the deposit will be returned. |
Before you rely on the details, read the current text of section 1950.5 at the link above for the dates on which each change applies. The California Courts also publish a plain-language guide to security deposits written for tenants, and it helps to know what it tells them.
How rent is prorated in escrow
Rent is split as of the closing date. You collect rent and pay the building's bills until title transfers, and from then on the income and the obligations belong to the buyer. Escrow squares the difference with credits.
Here is an example in days rather than dollars. Escrow closes on the 21st of a 30-day month, and a tenant paid the full month's rent on the 1st. You keep the rent for the 1st through the 20th, and the buyer is credited with the rent for the 21st through the 30th. Your contract decides whether the closing day itself counts as yours or the buyer's.
Escrow also settles these items:
- Prepaid rent for any period after closing is credited to the buyer.
- Security deposits are credited to the buyer, unless you return them to the tenants instead.
- Rent that is past due at closing is a negotiated term. The contract decides whether you keep the right to collect it, whether the buyer collects it on your behalf, and how a payment that arrives after closing is applied.
The buyer's first weeks as landlord
The leases pass to the buyer at closing, and a signed assignment of leases can put that in writing. Two deadlines then start running.
- Within 15 days, Civil Code section 1962 requires the new owner to give tenants the name, phone number and usual street address of each owner or person authorized to accept legal notices, and the name, phone number and address of the person or company that collects rent. If rent can be paid in person, the notice also gives the usual days and hours. A new owner that misses the deadline cannot evict a tenant for nonpayment of rent that came due while it was out of compliance.
- For RSO units, LAHD's registration bulletin gives a new owner 45 days from the close of escrow, or from the recording of the ownership change, to register the units, with a copy of the recorded deed or other proof of ownership. Registration certificates run from July 1 through June 30.
A joint letter at closing, signed by you and the buyer, can carry your deposit transfer notice and the buyer's section 1962 details together. Tenants then hear once, from both sides, who holds their deposit and where the next rent goes.
A closing checklist for an occupied building
- A rent roll that matches the leases, the ledgers and any estoppel certificates.
- A deposit schedule showing each unit, the amount held, the date it was collected and any claims against it.
- Copies of every lease, amendment and notice served, and the move-in photos for tenancies that began on or after July 1, 2025.
- Every buyout agreement, disclosure notice and LAHD filing, with the date each 30-day cancellation window closed. The buyouts page explains why the buyer will ask.
- Your LAHD registration records and rent registry filings.
- Signed deposit transfer notices, ready to send when escrow closes.
- The buyer's section 1962 details, so the tenant letter can go out the same day.