Can we keep security deposit if they owe us rent still when they leave? We live in Massachusetts.

Yes, so long as you are in compliance with subsection 4(i) of Mass. General Laws chapter 186, Section 15B, which reads (4) The lessor shall, within thirty days after the termination of occupancy under a tenancy-at-will or the end of the tenancy as specified in a valid written lease agreement, return to the tenant the security deposit or any balance thereof provided, however, that the lessor may deduct from such security deposit for the following (i) any unpaid rent or water charges which have not been validly withheld or deducted pursuant to any general or special law. So if your tenant validly withheld a portion of his/her rent payments (for example, because the premises were uninhabitable), then you CANNOT retain the security deposit to cover a portion of the unpaid rent. Be aware that Chapter 186, Section 15B has many technical requirements that landlords must comply with when it comes to security deposits.

Chapter 186 Section15(b) of the Massachusetts General Laws permits retention of a security deposit for unpaid rent. You are required, within 30 days of the end of the tenancy, to send a letter to the tenant describing why you are retaining the security deposit, and setting out your calculation of unpaid rent and security deposit applied. The written letter is critical to your being able to legally retain.