Security deposit, non-refundable deposit (zadatek), advance payment – differences and similarities
When deciding to rent out a property, many owners expect financial security. This is an effective way to reduce the number of canceled bookings and, in the worst case, secure at least part of the revenue. In everyday language, the words “security deposit” (kaucja), “advance payment” (zaliczka) and “non-refundable deposit” (zadatek) are often used interchangeably. However, according to their legal definitions, these three concepts differ significantly. What are a security deposit, a non-refundable deposit (zadatek) and an advance payment, and how do they differ?
Security deposit – what is it?
A security deposit is the first of the concepts related to financial security in rentals. It is much more common in long-term rentals of real estate, although it is also found in short-term rentals of movable property, e.g. a car or construction equipment. A security deposit is a specified sum of money held as security against the tenant's improper performance of the contract. This term mainly covers losses resulting from improper use of the rented item. A security deposit can therefore cover the cost of replacing a broken mirror or cleaning an exceptionally heavily soiled sofa. However, it cannot be used to settle normal wear and tear resulting from proper use, e.g. a burnt-out light bulb. A security deposit – as a rule – is refundable and does not constitute the creditor's income until damage occurs. If a loss is demonstrated that – under the contract – is covered by the security deposit, the retained portion of the deposit becomes the creditor's income. This amount must be taxed according to the rules for taxing rental income from real estate (the lump-sum tax on recorded revenue (ryczałt ewidencjonowany) at 8.5% or 12.5%).
What is a non-refundable deposit (zadatek)?
A non-refundable deposit (zadatek) is another concept intended to protect against termination of a contract. It is quite rare in the context of rentals and much more common in the sale of real estate or other items of significant value. A zadatek refers to securing a given sum of money in case the payer fails to meet the terms of the contract. This also applies to a situation in which the payer – that is, the person who wants to rent our premises – does not show up at the place and time specified in the contract. If the contract is not performed due to the payer, the person receiving the payment has the right to keep the deposit. However, if the contract is not performed through the fault of the person receiving the payment, the payer has the right to recover the deposit in the amount of twice the payment. This means that they will not only get back the money they paid, but will also receive exactly the same amount from the recipient as compensation. A zadatek – as part of the total amount owed for the rental – constitutes income and is subject to lump-sum taxation. Refunding the zadatek – despite the fact that half of it is a cost – will not be deductible because of the lump-sum taxation.
What is an advance payment?
The last of the concepts discussed is also the one most commonly used in short-term rentals of real estate. An advance payment (zaliczka) – also referred to as a “prepayment” – is a form of security credited toward a future payment. Put simply: it is the part of the amount due that the payer settles before arriving at the rented apartment. As a rule, an advance payment is non-refundable – this is the case when the service is provided or when the payer fails to fulfill the contract. However, if the contract is not fulfilled because of the party receiving the advance payment, the full amount is refunded. Unlike a zadatek, with an advance payment only the amount previously paid is returned. Interestingly, unlike a security deposit or a zadatek, the advance payment does not exist in the provisions of the Polish Civil Code (kodeks cywilny). This makes it necessary to specify precisely the terms of payment and settlement of the prepayment in the rental agreement. For tax purposes, the advance payment is settled only when the service is performed, i.e. at check-in at the rented apartment.
Security deposit, zadatek or advance payment – which form of security for short-term rentals?
Based on the characteristics of the advance payment, the zadatek and the security deposit, you can determine which forms of security work best for short-term rentals. The zadatek should certainly be rejected as the least favorable form of security. Random events – from a burst pipe to premises vandalized by the previous tenant – may result in us refunding the money and paying the same amount again on top. This in turn is an extremely unfavorable scenario in which, in addition to unforeseen costs and loss of income, we are obliged to pay compensation. A security deposit – given the type of security it provides – is used in long-term rentals rather than stays of a few days. However, nothing prevents you from including such security, treating it as a kind of insurance against the property being trashed. By far the most popular and most frequently chosen form of protection against booking cancellations is the advance payment. It is the one worth choosing by default for short-term rentals. Even a 25% advance payment significantly reduces the risk of cancellation. And even if a cancellation happens – the owner will not be left with an unused date and no payment.
