A security deposit is a common requirement when someone seeks to enter a lease agreement. Security deposits allow landlords to cushion financial losses that a tenant may cause them during their tenancy. Both landlords and tenants should know how North Carolina’s security deposit law benefits them.
Quick Facts for North Carolina
- Maximum Amount: Depends on length of lease (breakdown below)
- Duration for Return: 30 days after end of lease
- Penalty for Late Returns: Forfeits all rights to deposit
- Deadline to Claim Funds: 6 months
The Purpose of a Security Deposit
Security deposits serve as a safety net for landlords should they suffer financial losses caused by the tenant, who may have damaged the rental property, or breach the lease agreement, or skipped on the rent.
North Carolina’s security deposit law, NC G.S. §42-50 to 42-56, applies to all persons, firms, or corporations that renting or manages residential dwelling units, with the exception of single rooms, on a weekly, monthly or annual basis (NC G.S. § 42-56).
Security Deposit Maximum in North Carolina
Landlords are required to charge a tenant a security deposit amount based on the length of a lease (NC G.S. § 42-51(b)):
- Week-to-week: Security deposit shouldn’t be more than two weeks’ rent
- Month-to-month: Security deposit shouldn’t be more than one and one-half months’ rent
- Leases Longer than month-to-month: Security deposit shouldn’t be more than two months’ rent
North Carolina landlords can charge tenants a reasonable, nonrefundable fee for pets kept on the premises (NC G.S. § 42-53).
Storing the Security Deposit
A tenant’s security deposit should be stored in one of two ways by a landlord:
- Trust Account: The account must be established in a licensed and federally insured banking institution or a trust institution in the State of North Carolina.
- Bond: A landlord may choose to post a bond from an insurance company licensed in the state of North Carolina.
- Notification: The landlord is required to notify the tenant within 30 days after the lease term begins of the name and address of the bank or institution where the deposit is held, or the name of the insurance company providing the bond (NC G.S. § 42-50).
Returning the Security Deposit
Landlords must follow certain guidelines when it comes to returning a tenant’s security deposit (NC G.S. § 42-52).
- Itemized List: When a tenant’s tenancy has ended, the landlord may apply the deposit to cover damages. The landlord must provide the tenant with a written itemized list of any damage, which should be mailed or delivered to the tenant within 30 after tenancy termination, along with any remaining deposit balance.
- 30 Days: If a landlord is not intent on applying the tenant’s security deposit towards damages, it must be returned to the tenant within 30 days.
- 60 Days Final Accounting: If the landlord is unable to correctly determine the final charges for damage within 30 days after tenancy termination, the landlord must provide the tenant with an estimate within that 30-days period. A final determination of the charges for damage must be given to the tenant within 60 days after termination of the tenancy.
- Unknown Address: If the tenant’s address is unknown, the landlord can use the security deposit to cover damages after 30 days of tenancy termination. The tenant has six months to collect the balance of the security deposit.
North Carolina landlords may hold all, or a portion of a tenant’s security deposit for the following reasons (NC G.S. § 42-51 (a)):
- Unpaid rent, water or sewer services and electric service
- Damage to the rental property
- Damages as a result of breach of lease, except in the instance where the tenant was forced to leave the property because of the landlord’s violation, or the tenant is a victim of domestic violence, sexual assault or stalking
- Costs of re-renting the rental unit after breach
- Costs of removal and storage of the tenant’s property after an eviction
- Court costs
- Any unpaid bills the tenant has accumulated that become a lien against the rental unit
Failure to Return the Security Deposit
If a landlord fails to account for and refund the remainder of the tenant’s security deposit as required, the tenant can sue the landlord to recover their security deposit. If the landlord willfully fails to comply with the deposit, bond, or notice requirements, the landlord forfeits his/her right to claim the security deposit (NC G.S. § 42-55).
Last Month’s Rent
A security deposit is not intended to be used to cover a tenant’s last month’s rent, but the provision can be established in the rental agreement.
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: 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.
- “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.
Property Change Ownership
When the rental unit changes ownership, the landlord has 30 days to do one of two things:
- Transfer the portion of the deposit remaining after making lawful deductions to the new owner and notify the tenant by mail of the transfer of ownership and of the new owner’s name and address
- Return the portion of the security deposit remaining to the tenant after making lawful deductions (NC G.S. § 42-54).
Tips for North Carolina Landlords on the Right Practices for Security Deposits
- Charge tenants a security deposit amount based on the requirement for leases of a certain duration
- Return a tenant’s security deposits within 30 days after tenancy termination
- Withhold security deposits for unpaid rent, sewage, water, electric, damage that is beyond normal wear and tear, cost of re-renting, court costs and other costs related to a breach of the lease agreement
- Seek damages in legal proceedings if the security deposit is insufficient to cover the losses caused by the tenant
Knowing North Carolina’s security deposit law will help both landlords and tenants to understand their rights. Landlords have a duty to remain in compliance with the state’s security deposit law. Tenants should stand by their lease obligations in order to secure a refund of their security deposit at the end of their lease term. North Carolina security deposit law can be found in NC GS §42-50 to 42-56.