New Jersey
Security Deposit Law

QUICK FACTS
  • Standard Limit / Maximum Amount: 1 and 1/2 months’ rent (read more).
  • What Can Be Deducted:  Unpaid rent and cost of damage in excess of wear and tear (read more).
  • Time Limit for Return: 30 days after the end of lease, less days for termination for certain causes. (read more).
  • Penalty if Not Returned on Time: Double the amount withheld, costs of suit and attorney’s fees (read more).

Purpose. Security deposits are like safety nets. They ensure compensation for any loss that the landlord might incur because of the tenant’s acts. It covers for incidents like damage to the property, termination of the lease without notice or non-payment of rent.

Legal Basics. New Jersey landlords can demand a maximum of 1 and 1/2 months’ rent as security deposit from which unpaid rent and cost of damages incurred may be deducted. It must be returned within 30 days with an itemized list of deductions if there are any. Otherwise, the landlord may be made to pay a penalty of up to double the amount withheld.

Maximum Security Deposit Charge in New Jersey

In New Jersey, landlords cannot charge a tenant security deposit that is more than 1 and 1/2 months’ rent. If a landlord increases the rent, the security deposit may be increased as well, but the increase in the security deposit is limited to only a 10-percent increase per year.

Security Deposit Holdings in New Jersey

Security deposits should not be mingled with the landlord’s personal finances. New Jersey landlords who hold or receive security deposit for 10 or more rental units must either:

  1. invest the aggregate amount of security deposits in shares of an insured money market fund; or
  2. deposit the same with a state or Federally chartered or insured bank or saving and loans association under an account that earns a variable interest rate.

For landlords who receive security deposit for less than 10 rental units, the landlord must deposit the same with a state or Federally chartered or insured bank or savings and loans association under an account that earns the usual rate of interest paid by those institutions.

The landlord should provide the tenant with a written notice regarding the latter’s security deposit within 30 days of receiving or moving the same. The notice must contain the following:

  1. the name and address of the institution where the latter’s security deposit is;
  2. the type of account;
  3. the current interest rate; and
  4. the amount of security deposit held therein.

Failure to Comply with Security Deposit Holding Requirements: The tenant may compel the landlord to credit the security deposit (plus an additional 7% interest thereon) as rent if the landlord fails to:

  1. invest or deposit the security deposit as required;
  2. provide the notice required; or
  3. pay the interest accrued,

To do so, the tenant must deliver a written notice to the landlord of the non-compliance and state that the tenant is exercising the right to use the security deposit as rent payment. The landlord will not be allowed to collect any additional security deposit to replace what has been credited in this manner. 

Security Deposit Interest in New Jersey

Interest earned by the tenant’s security deposit belongs to the tenant. The landlord is to pay the same to the tenant or credit it to the latter’s rent on the anniversary of the lease. The tenant may choose to get the payment of interest or have it credited to the rent on January 31st every year by providing the landlord with a notice of the tenant’s intention to do so.

The landlord must also provide the tenant with an updated notice of the details of the tenant’s security deposit at the time of each interest payment.

Allowable Deductions on Security Deposits in New Jersey

New Jersey landlords can make the following deductions from a tenant’s security deposit:

  • Unpaid rent; and
  • Damage to the property that exceeds normal wear and tear.

Can the deposit be used by the tenant as last month’s rent? Not usually, but it can be done if there is a written agreement between the parties to do so. Also, as mentioned above, the tenant may have the option of using the security deposit as rent should the landlord fail to comply with the latter’s duties in holding the security deposit.

“Normal Wear and Tear” vs. Damage in New Jersey

  • “Normal wear and tear” refers to the deterioration of the property that happens when the property is used as it was meant to be used and only when that deterioration occurs without negligence, carelessness, accident, misuse, or abuse by the tenant or the people the tenant brings there. They are minor issues that occur naturally like aging and expected decline as a result of everyday living. These can include gently worn carpets, loose door handles, fading wall paint and flooring, stained bath fixtures, lightly scratched glass, dirty grout and mold that occur naturally.
  • Damage,” on the other hand, refers to the destruction that occurs because of abuse or negligence by the tenant during the course of the tenancy. It diminishes the usefulness, value, or normal function of the rental unit. Some examples are pet damage (heavily stained and ripped carpet), broken tiles, holes in the wall, broken windows and missing fixtures.

Check out our article on wear and tear vs. damage to get a better idea of the difference.

Returning Security Deposits in New Jersey

Time Frame: The landlord should return the tenant’s security deposit, plus interest or earnings, minus any deductions, by personal delivery, registered or certified mail within 30 days after the termination of the tenancy. However, New Jersey security deposit laws provide shorter periods in certain cases:

  1. If the tenant ended the lease because of domestic violence, the landlord has 15 days to return the security deposit; and
  2. If the lease was ended because the tenant was displaced as a result of flood, fire, evacuation or condemnation of the property the landlord has 5 days to return the security deposit.

Also, if there are deductions on the security deposit, the landlord is required to inform the tenant of the specifics of the same in an itemized list on a written notice to be mailed to the tenant together with the remaining amount to be returned within the same timeframe.

Failure to Return Security Deposit as Required: If the landlord refuses or fails to return the security deposit within the period allowed, the tenant stands to recover up to double the amount the landlord is withholding. That means a tenant can possibly recover up to 3 months’ worth of rent if the landlord fails to return the deposit on time.

Security Deposits and Tax Filing in New Jersey

How the security deposit will be treated tax-wise depends on whether or not the landlord gets to keep it (or part of it).

Taxable income: Security deposits are not automatically considered income when the landlord receives them. The IRS advises to not include security deposits as income if the landlord may still be required to return the same. They only become taxable income when the landlord no longer has any obligation to refund them. For example, if the security deposit was given in 2019 but was only forfeited in 2020, then the landlord should only include it as income in 2020.

Reporting security deposit as income: Whether or not security deposit should be reported as income and when to do so will depend on what it is being applied to or used as. Below are 3 simple rules the IRS has suggested to follow:

  1. If the deposit is forfeited due to a breach of the lease or applied to unpaid rent, then the amount kept should be declared as income in the year it was forfeited or applied.
  2. If the security deposit is used to cover expenses that are chargeable to it, then the landlord should only include the part of the deposit used as income if the landlord includes the cost of repairs as expenses. If the landlord doesn’t include them as expenses as a matter of practice, then there’s no need to include the part of the deposit kept to cover them as income.
  3. If there is an agreement between the parties to use the deposit or part of it as the final month’s rent, then the landlord should include it as income when the same is received.

Additional Rules & Regulations in New Jersey

Receipt Requirements: The landlord is not required to provide a receipt for the security deposit in New Jersey.

New Property Owner’s Responsibility: If the rental property is sold or transferred to somebody else during the lease, the landlord will only be relieved of responsibility for the security deposit upon transferring the same to the new owner along with any interest due. The landlord must do so upon the transfer of ownership or within 5 days of the same.

Regardless of whether the landlord has transferred the security deposit to the new owner, the new owner inherits all the landlord’s responsibility regarding the security deposit. This includes investing or depositing it, notifying the tenant of the details of how the security deposit is being kept, paying and accounting for interest, and for returning the same at the end of the tenancy.

For additional questions about security deposits in New Jersey, please refer to the official state legislation, New Jersey Revised Statutes § 46:8-19 to 21.4 for more information.