From the law, I see that since I didn't give them a copy of the checklist, the security deposit is not "legal".

Colorado is a great site for that if you think of out of state 

Have you considered investing out of state for investing in cash flowing deals? 

Yet for some reason you keep bringing up the "is this your primary house, have you lived in it for 2 years" nonsense.Again, you don't understand the non qualified use periods or actual rental tax law.

Just keep track of all your costs, expenses, etc and at tax reporting time enter all the information.I found it invaluable as a tool to learn more about tax law and play with "what-if" scenarios.

Ohio has emerged as a primary focus in my extensive search across various states (I have looked into many states).

However, it is important to review state and local laws regarding landlord-tenant relationships, as restrictions may apply in certain jurisdictions.

Still recommend checking your local laws.

Does this apply to every state? 

Jimmy, with you situation as stated, your options are limited.