New Jersey may be the Garden State, but landlords can’t just bury a tenant’s security deposit in any regular bank account and dig it up when it’s time to give it back. Managing security deposit money this way is unnecessarily messy (and illegal).
In this piece, I’ll go over everything landlords need to know about security deposits in New Jersey, including how to store them, return them, and more. Once you know the rules and have a system in place, you can handle tenants’ security deposits with ease.
What Is the Rent Security Deposit Act for New Jersey?
The Rent Security Deposit Act (N.J.S.A. 46:8-19 – N.J.S.A. 46:8-26) outlines local landlord tenant laws for collecting, storing, and returning a resident’s security deposit.
This Act doesn’t apply to all landlords, though. You’re off the hook if your units are for seasonal use or rental, meaning they’re rented for 125 days or less by someone with a permanent home elsewhere. It also doesn’t automatically apply to owner-occupied properties with only one or two residential rental units, including yours.
For all other residential rental properties in New Jersey, the security deposit statute rules apply even if the lease claims otherwise. Note that additional regulations may apply depending on the town and county.
Key Elements of the New Jersey Security Deposit Law
Landlords are required to follow these rules.
1. Security Deposit Limit
In New Jersey, the maximum amount for a refundable security deposit cannot exceed one-and-a-half month’s rent. Landlords can raise the security deposit after a rent increase, but the security deposit amount can’t be more than 10% in any given year.
For example, pretend a tenant’s rent is $2,000. The maximum security deposit for this rental would be $2,500.
Let’s say you raise the rent to $3,000 and want the tenant to pay more toward the security deposit. You can collect an additional $200, which is 10% of the previous security deposit ($2,000).
Related: 8 Best Rent Collection Apps & Software for Landlords
2. Where Security Deposits Can Be Stored
New Jersey landlords have two options for where to store a tenant’s security deposit.
Portfolios with fewer than 10 rental units
For portfolios with fewer than 10 rental units, landlords have to hold tenants’ security deposits in an interest-bearing bank account in a state or federally chartered banking institution within New Jersey, insured by the federal government.
These accounts cannot commingle security deposit money with your own bank account or any business bank account with other income (e.g., rent payments).
Some landlord banking accounts are designed specifically for managing security deposits and interest accrued, such as Baselane.
Baselane (Interest-bearing bank accounts for security deposits)
Baselane is Young and the Invested’s top-rated pick for both renters and landlords who need a real estate bank account for holding security deposits and other real estate banking needs, such as free automatic monthly rent payments and comprehensive cash flow analytics.
This landlord banking software lets you open multiple security deposit accounts per property. There are no account fees or minimum balance requirements. Each interest-bearing account receives a highly competitive APY (details found in the product box below and are subject to change), unlimited 1% cash back, and up to 5% cash back on home improvement spend.
It’s free to create an account, and it’s easy to get started. If you enjoy the simplicity of security deposit accounts through Baselane, you can access other useful products and services through the platform, including landlord insurance or open additional bank accounts for rental income and expenses.
- Baselane is a complete rental property financial management system.
- The bank account for landlords has no fees and offers high yields on all balances (4.19% APY as of 5/30/2024), unlimited 1% cash back on debit card spend, and up to 5% cash back on home improvement spending.* Other features include check writing, same-day ACH payments, and up to $2.5 million in FDIC insurance.
- Baselane also offers bookkeeping, rent collection, analytics, and more.
- Special Offer ($150 bonus): Earn a $150 bonus after completing four steps with your Baselane Banking account. (1) Make a deposit of greater than $500 into a Baselane banking account within 30 days. (2) Maintain that average balance for 60 days. (3) Make more than $1,500 worth of mortgage payments within 90 days. (4) Collect more than $1,500 of rent via Baselane into Baselane Banking within 90 days.
- Free high-yield bank account
- Free online rent collection
- Same-day ACH payments
- Check writing
- Generous cash back on qualified debit card spend
- Up to $2.5 million in FDIC insurance
- 50 states lease creation and e-sign
- Provides Zillow-sourced market values automatically
- No tenant screening services
- No rental property listing capabilities
Portfolios with 10 or more rental units
Portfolios with 10 or more units also have the option to store security deposits in separate bank accounts that bear interest, but they can also invest a tenant’s security deposit in a money market fund. A money market fund is a type of mutual fund that invests in liquid, short-term debt securities.
For this option, the investment company must be based in New Jersey, registered under the Investment Company Act of 1940, and have shares registered under the Securities Act of 1933. The fund must have a maturity date of one year or less.
Related: How to Open a Security Deposit Account [Hold Rent Deposits]
3. How Security Deposit Interest Works
Landlords must distribute tenant interest on security deposits annually on the anniversary of the lease start date. Alternatively, annual interest payments can be on Jan. 31 if you provide a written notice. Tenants can request to have security deposit interest payments made in cash or credited toward their next month’s rent.
Related: 8 Best Online Rent Payment Systems [Rent Collection Services]
4. What Written Notices Are Required
Phone calls won’t cut it. There are several actions involving security deposits that require a written notice to tenants, including the following:
- Within 30 days of receiving a security deposit, the tenant must be provided the name and address of where the security deposit is stored, the type of bank account it is stored in, the current interest rate for that account, and the deposit amount.
- An additional written notice isn’t required if this information is included in a security deposit lease clause.
- If you transfer security deposit funds to a different money market fund or bank, the tenant must be informed within 30 days.
- Each year, tenants must receive a notice at the time of the annual interest payment.
- When transferring ownership or control of the property, tenants must be informed within 30 days.
Related: How to Find Good Tenants With Online Rental Listings
5. When Landlords Can and Can’t Make Security Deposit Deductions
In certain situations, a landlord can keep some or all of a tenant’s security deposit. If there is damage to the property that exceeds normal wear and tear or an overdue balance for unpaid rent or utilities, the tenant’s security deposit reimburses these costs. Tenants must move out before landlords make any security deposit deductions.
Related: 7 Best Banks for Real Estate Investors + Landlords
6. When Security Deposits Must be Returned
Usually, a New Jersey landlord has 30 days to return security deposits after a tenant moves out or their lease is terminated. You also have to return any interest security deposits accrue. If any deductions were made, tenants must receive an itemized list. This list must be sent by certified or registered mail or delivered by hand.
Sometimes, a security deposit needs to be returned faster. If a tenant ends a lease because of domestic violence, the security deposit must be returned within 15 days. Within three business days after lease termination, the tenant must be informed, in writing, of when and where to pick up the deposit.
Tenants displaced due to a fire, flood, evacuation, or condemnation of property must receive security deposit refunds within five days. These tenants also require a written notice within three business days of when and where the security deposit will be available.
In the event a security deposit isn’t returned within the necessary time frame, tenants can file a claim in court for up to twice the amount wrongly withheld, plus court costs and (reasonable) attorney fees. Additionally, tenants can take legal action if a landlord fails to give interest or earnings due, doesn’t provide an itemized list of deductions, or the deductions are unreasonable.
Related: Best Property Management Software for Landlords [Free + Paid]
New Jersey Security Deposit Law: FAQs
What happens to the security deposit if you sell a property?
In New Jersey, if a landlord sells a property, security deposit funds must be transferred from the tenant security deposit accounts, with any interest accrued, to the new owner within five days. Additionally, tenants must be notified of the transfer by registered or certified mail within 30 days.
It is the new owner’s duty to invest the security deposits in a separate account specifically designated for deposits, give notices, pay interest, and return deposits (plus any accrued interest) when the time comes.
What is considered normal wear and tear vs. damage?
Normal wear and tear happens naturally as a tenant uses the accommodations as they were designed to be used. Some examples of standard wear and tear include:
- Faded flooring and paint
- Gently worn carpets
- Slightly dirty grout
- Stained bath fixtures
- Loose door and cabinet handles
Damage happens when tenants are negligent or purposely destructive. For instance, any of the following is usually considered damage:
- Broken windows
- Torn or burned carpets
- Missing fixtures
- Holes in a wall
In New Jersey, landlords can’t make security deposit deductions for cleaning unless the tenant causes damage that requires cleaning.
While New Jersey law doesn’t mandate documenting a unit’s condition at move-in, it’s recommended that landlords and residents document any pre-existing damage.
Do you pay a security deposit before signing a lease in New Jersey?
Typically, New Jersey renters are asked to pay the first month’s rent as well as the security deposit when signing a lease for a new unit. Rentals that require security deposit funds upfront should list these policies in lease agreements.
Can a landlord use a security deposit for rent in NJ?
New Jersey law doesn’t prohibit a security deposit from being used for outstanding rent. If a tenant demands a security deposit be used instead of paying rent, the landlord is allowed to begin the eviction process during the last month of tenancy.
On the flip side, when a landlord doesn’t follow their responsibilities regarding a security deposit, a tenant can demand (in writing) that a security deposit be used toward rent.
Is a pet deposit considered a security deposit?
Yes. In New Jersey, a pet deposit is a security deposit. However, the pet deposit amount is included in the security deposit limit of 1.5 times the monthly rent payment. For instance, if rent is $1,500, a security deposit couldn’t exceed $2,250, including a pet deposit. Landlords can still charge a monthly pet fee on top of a one-time pet deposit. Fees are not refundable like deposits.
Landlords cannot charge a pet deposit for service dogs and emotional support animals (ESAs). ESAs are covered by the Fair Housing Act. Providing a person shows a valid ESA letter, the landlord can’t refuse to rent them a property or allow the animal to live with them.
Do you need a separate escrow account specifically designated for each unit?
Yes, you do need to have a separate account designated for each unit, but it does not have to be an interest-bearing escrow account specifically.
All landlords, regardless of number of rental units, can use a simple interest-bearing bank account at a state or federally chartered regulated financial institution insured by the federal government. Landlords with greater than 10 rental units also have the option of investing security deposits in an insured money market fund established by an investment company based in New Jersey.
Related:
- Best Accounting Software for Rental Properties [Free + Paid]
- Which Type of Real Estate Investment is Right for You? 8 to Know
- How to Verify Income as a Landlord [Show Proof of Income]
*Information in this article is not legal advice and, as laws change frequently, may not reflect the current law.
