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Security Deposit Law

QUICK FACTS
  • Standard Limit / Maximum Amount: 2 weeks’ rent for weekly-to-week leases, ½ month rent for month-to-month leases and 1 month for leases that have terms of longer than month-to-month (read more)
  • What Can Be Deducted: Unpaid rent, unpaid bills, damage to the unit, costs resulting from the tenant’s faults, and fees for late payment or eviction (read more)
  • Time Limit for Return: 30 days from the end of the lease (read more)
  • Penalty if Not Returned on Time: Court-awarded damages plus attorneys fees (read more)
  • Tenant’s Deadline to Claim Funds: 6 months (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. North Carolina landlords can demand a maximum of two months’ rent as security deposit from which unpaid rent, bills, damages incurred, and fees for late payment or eviction may be deducted. It must be returned within 30 days if. Otherwise, the landlord may be made to pay damages, costs of suit and attorney’s fees.

Maximum Security Deposit Charge in North Carolina

The maximum security deposit North Carolina landlords can charge depends on the term of the lease. For week-to-week leases, the limit is two weeks’ rent. For month-to-month leases, the maximum security deposit is one and one-half (1 ½) months’ rent. For leases with longer terms than month-to-month, the limit is two months’ rent.

However, the above limits, as well as the other rules on security deposits discussed below, do not apply to the lease of single rooms.

Additional Pet Deposit

If the tenant has a pet, North Carolina landlords can charge a reasonable nonrefundable fee as pet deposit.

Security Deposit Holdings in North Carolina

When holding security deposits for tenants, North Carolina landlords are required to take one of the two options below:

  1. The landlord can place the security deposit in a 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; or
  2. The landlord may choose to post a bond from an insurance company licensed in the state of North Carolina. The bond should be in the amount of the security deposit the landlord is holding for the tenant

Upon complying with either one of the options above, the landlord must 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

Allowable Deductions on Security Deposits in North Carolina

The landlord can only use the security deposit when the lease or tenancy has ended or has been terminated. Also, the landlord can only use the security deposit to cover:

  1. Unpaid rent, water or sewer services and other bills that may be claimed against the unit
  2. Damage to the premises,
  3. Damages as the result of the nonfulfillment of the rental period,
  4. Costs of re-renting the premises including reasonable broker fees.
  5. Costs of removing or storing the tenant’s property left in the unit
  6. Court costs and valid late payment or eviction fees

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.

“Normal Wear and Tear” vs. Damage in North Carolina

North Carolina security deposit laws specifically state that landlords are not allowed deduct to restore damage that is due to normal wear and tear.

  • 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, is deterioration or destruction that is the tenant’s fault, either through deliberate acts or as a result of negligence during the tenancy period.

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

Returning Security Deposits in North Carolina

Time Frame: The landlord has 30 days from the end of the lease and upon getting the premises back to return the security deposit. If there are deductions on the security deposit, the landlord must provide the tenant with an itemized list of the same. This list must be in writing and must be sent to the tenant with the rest of the security deposit within the same time frame.

If the landlord cannot reasonably finish or determine the cost of the restorations that are to be charged on the security deposit, the landlord may send an interim list of deductions first during the 30 days. However, the landlord must provide a final accounting for the security deposit within 60 days from the end of the lease.

Failure to Return the Security deposit on Time: If the 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 the security deposit. If the landlord is found to have willfully failed to comply with the deposit, bond, or notice requirements, the landlord will forfeits all rights to the security deposit and may be required to return the security deposit and pay damages incurred by the tenant due to the landlord’s noncompliance plus attorney’s fees.

Unclaimed deposit: If the tenant’s address is unknown, the landlord is only obligated to hold the security deposit and make it available for claiming for at least 6 months. Thereafter, the landlord is no longer required to hold the same for the tenant and may no longer be compelled to return the same.

Security Deposits and Tax Filing in North Carolina

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 North Carolina

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

Security Deposit Interest in North Carolina: North Carolina laws do not require landlords to pay interest on the security deposit

New Property Owner’s Responsibility: If the property is sold or transferred during the term of the lease, the landlord will only be released from all liability for the security deposit upon doing one of the two things below:

  1. Transfer the portion of the deposit remaining, after making the allowed deductions therefrom, to the new owner and notify the tenant of the transfer of ownership and of the new owner’s name and address.
  2. Return the portion of the security deposit remaining to the tenant after making lawful deductions.

If the landlord chooses to do option 1 above, then the new owner will inherit the old landlord’s obligations regarding the security deposit.

For additional questions about security deposits in North Carolina, please refer to the official state legislation, North Carolina General Statutes § 42-50 to § 42-56, for more information.