Landlords should familiarize themselves with the statewide regulations that govern security deposits in New Jersey and understand their responsibilities.
Quick Facts for New Jersey
- Maximum Amount: Cannot exceed 1 ½ month’s rent
- Duration for Return: 30 days after end of lease; 15 days if the tenant ended the lease because of domestic violence; 5 days if the tenant was displaced because of a flood, fire, evacuation, etc.
- Penalty for Late Returns: Refund deposit amount, plus any amount awarded by court
- Limit for Security Deposit Increase: 10% each year
There are specific rules and regulations related to New Jersey’s security deposit law that governs the landlord-tenant relationship. Security deposits function as a safeguard against losses that a landlord may may experience due to a tenant’s action. Landlords should remain compliant with the state’s deposit law, while tenants should adhere to the obligations in the rental agreement.
The Purpose of a Security Deposit
Security deposits serve as a safety net for landlords should they suffer financial losses caused by the tenant doing damage to the rental property, or a breach of the lease agreement, or unpaid rent.
Security Deposit Charge
New Jersey landlords can only charge a tenant a security deposit that is equal to one and a half month’s rent. If a landlord increases the rent, the increase can be included in the security deposit, but is limited to only a 10-percent increase annually (N.J.S.A. 46:8-21.2).
Security deposits should not be mingled with the landlord’s personal finances (N.J.S.A. 46:8-19).
Storing the Security Deposit
The landlord is required to invest the security deposit in shares of an insured money market fund, hold the deposit in an interest-bearing account in a State or federal banking institution. This rule doesn’t apply to persons receiving security deposits for less than 10 rental units, except where required specifically by the law (N.J.S.A. 46:8-19, a. (1)).
- Notification Required: The landlord should notify the tenant in writing of the name and address of the investment company, or financial institution where the security deposit is held or invested, the type of account it’s held in or invested, the current interest rate and the amount of security deposit or investment (N.J.S.A. 46:8-19, c).
- Notification Time-frame: The landlord should notify the tenant within 30 days of receiving the security deposit, transfer of ownership or control of the property, or of moving the deposit from a financial institution or fund to another. In the case of a merger of institutions or funds, then within 30 days of receiving notice of the merger, or from one account to another account (N.J.S.A. 46:8-19, c. (1-5)).
- Non-Compliance With Notification Requirement: If the landlord fails to invest or deposit the security deposit as required, or to provide the notice or pay the interest, the tenant may deliver a written notice to the landlord of that failure and state that he/she wants the landlord to use the security deposit, plus 7 percent interest, to go towards rent payment. The tenant can allow the landlord 30 days from the mailing date or hand delivery of the notice to comply (N.J.S.A. 46:8-19, c. (5)).
Return of Security Deposit
Time-frame (N.J.S.A. 46:8-21.1):
- 30 days: Within 30 days after the termination of the tenancy, the landlord should return the tenant’s security deposit, plus interest or earnings, minus any deductions, by personal delivery, registered or certified mail.
- 15 Days: A landlord has 15 days to return the security deposit if a tenant has ended their lease because he/she is a victim of domestic violence.
- 5 Days: The landlord 5 days to return the deposit if a tenant has experienced displacement as a result of flood, fire, evacuation or condemnation of property.
New Jersey landlords can make the following deductions from a tenant’s security deposit:
- Unpaid rent
- Damage to the property that exceeds normal wear and tear
Applying Security Deposit as Last Month’s Rent
A security deposit is not intended to be applied to a tenant’s last month’s rent. However, if the landlord doesn’t pay the interest on the security deposit or does not give the tenant a notice about the deposit every year, the tenant can use the deposit to pay past or future rent due (N.J.S.A. 46:8-19(c)).
How to Get a Full Refund of Security Deposit
At the end of the tenancy, a full security deposit can be returned to the tenant if there is no damage to the rental property, rent is paid in full, all charges in the rental agreement are covered.
Security Deposits and Tax Filing
What happens to the deposit at the end of the tenancy determines how it is treated for tax purposes.
- Accounting for Security Deposits: Security deposits are treated as either assets or liabilities when filing taxes. Tenants shouldn’t deduct security deposits as expenses and landlords shouldn’t declare them as income when in escrow intended to be returned to the tenant.
- Security Deposit Write-Off: Landlords cannot deduct security deposits as expenses until it becomes as such. If a landlord withholds part or all of the security deposit for losses, that amount should be included as income when filing taxes. Forfeited deposits should be declared as income.
“Normal Wear and Tear” vs. Damage
- “Normal wear and tear” is deterioration that occurs as a result of everyday use of the rental unit, and without negligence, carelessness, accident, or misuse or abuse by the tenant. It can include minor issues, such as gently worn carpets, loose door handles and fading wall paint and flooring.
- “Damage” refers to destruction to the rental unit that occurs because of abuse or negligence by a tenant during the course of the tenancy and can affect usefulness, value, normal function of the rental unit.
Transfer of Ownership
If the rental property is sold/transferred ownership, the landlord has a responsibility to transfer the security deposits, along with any interest earned, to the new owner within five days. The landlord must notify tenants within 30 days of the transfer by registered or certified mail, as well as of the transfer of the security deposits to the new owner. The written notification should include the new owner’s name and address. The new owner will be responsible for returning the deposit to the tenant, plus any accrued interest, if the previous landlord did not transfer the security deposits to the tenant (N.J.S.A. 46:8-20 and 21).
Tips for New Jersey Landlords on the Right Practices for Security Deposits
- Charge tenants a security deposit in the amount of one and a half month’s rent
- Return security deposits within 30 days of tenancy termination or lease agreement
- Return security deposit within 15 days if a tenant has ended their lease because he/she is a victim of domestic violence
- Return the security deposit within 5 days if a tenant has suffered displacement as a result of flood, fire, evacuation or condemnation of property.
- Withhold security deposits for unpaid rent and damages to the rental unit in excess of normal wear and tear.
- Seek damages in legal proceedings if the security deposit is insufficient to cover the losses caused by the tenant
New Jersey landlords and tenants should know how the state’s security deposit law applies to them. Both parties should aim to protect their interests and comply with the law. Landlords should remain in compliance while protecting their assets. Tenants should follow through on their lease obligations. Refer to New Jersey Statutes Annotated 46:8-19 to 26 for more on the law on security deposits in New Jersey.