Does a North Carolina Landlord Have to Keep the Deposit in a Trust Account?

What G.S. 42-50 says

Security deposits from the tenant in residential dwelling units shall be deposited in a trust account with a licensed and federally insured depository institution or a trust institution authorized to do business in this State, or the landlord may, at the landlord's option, furnish a bond from an insurance company licensed to do business in North Carolina. The security deposits from the tenant may be held in a trust account outside of the State of North Carolina only if the landlord provides the tenant with an adequate bond in the amount of the deposits. The landlord or the landlord's agent shall notify the tenant within 30 days after the beginning of the lease term of the name and address of the bank or institution where the tenant's deposit is currently located or the name of the insurance company providing the bond. N.C. Gen. Stat. § 42-50

A trust account or a bond

The statute gives two ways to hold the deposit. One is a trust account with a licensed and federally insured depository institution or a trust institution authorized to do business in North Carolina. The other, at the landlord’s option, is a bond from an insurance company licensed in North Carolina.

The Act does not define a trust account. The North Carolina Real Estate Commission describes one as a bank account designated “trust” or “escrow” that holds none of the landlord’s or broker’s own money; that is the Commission’s description, not a definition in the Act. An ordinary personal or business account that also holds your own money does not fit it. A licensed real estate broker holding the deposit has rules of their own: the Commission’s trust-money rule requires it to go into a trust or escrow account, as a rule within three banking days of receipt, or, for a deposit paid other than in cash with a pending offer to lease, no later than three days after the offer is accepted (21 NCAC 58A .0116(a), (b)(3)), and the Commission’s brochure describes the bond as available where the owner holds the deposits.

Can the trust account be outside North Carolina?

Only with a bond. A trust account outside North Carolina is allowed only together with a bond for the amount of the deposits, which the landlord provides to the tenant.

The 30-day notice of where the deposit is held

The notice has a deadline and required content. The landlord or the landlord’s agent must tell the tenant, within 30 days after the beginning of the lease term, the name and address of the bank or institution where the deposit is currently located, or the name of the insurance company providing the bond. The simplest way to meet both is to put them in the lease.

The statute does not say “in writing”. The Real Estate Commission’s brochure does, and a written notice is the easiest kind to prove.

The statute says where the deposit is “currently located”, and the Commission reads the duty as continuing: move the deposit to another institution and the tenant must be told. That is the Commission’s reading.

A notice given late

The Act does not say what a late notice costs. The forfeiture in G.S. 42-55 is for a willful failure to comply with the notice requirement, and we found no North Carolina appellate decision on whether a notice given after day 30 is one. Keep the notice you did give, and the date.

A checklist at the start of a tenancy

The statute’s two requirements, and the record that shows you met them:

1. Hold the deposit in a trust account with a licensed and federally insured depository institution or a trust institution authorized to do business in North Carolina, or furnish a bond from an insurance company licensed in North Carolina. A trust account outside the State needs a bond as well, in the amount of the deposits.
2. Within 30 days after the lease term begins, tell the tenant the name and address of the bank or institution holding the deposit, or the name of the insurance company providing the bond.
3. Keep proof of the notice and its date.

What a failure costs

G.S. 42-50 is the section the forfeiture sentence most plainly reaches, and only for a willful failure. The remedies section, G.S. 42-55, says:

The willful failure of a landlord to comply with the deposit, bond, or notice requirements of this Article shall void the landlord's right to retain any portion of the tenant's security deposit as otherwise permitted under G.S. 42-51. N.C. Gen. Stat. § 42-55

The sentence was added in 2009, and it does not say which sections “the deposit, bond, or notice requirements” are. The North Carolina Court of Appeals has held they are those of G.S. 42-50, in a published 2014 decision:

We conclude that the full refund remedy is available only for willful violations of section 42-50, the only section of the Act containing provisions regarding deposit, bond, and notice vis a vis security deposits Neil v. Kuester Real Estate Servs., Inc., 237 N.C. App. 132, 764 S.E.2d 498 (2014)

So a willful failure of the deposit, bond or notice requirements of G.S. 42-50 voids the right to keep any part of the deposit, even for unpaid rent or real damage (G.S. 42-55; Neil v. Kuester, 2014).

The sentence leaves questions open. “Willful” is not defined, and we found no North Carolina appellate decision on what a tenant must show to prove it under this section. And what is voided is the right to retain from the deposit: the Act does not say the underlying debt is extinguished, and we found no appellate decision on whether a landlord in that position can still sue separately for unpaid rent or damage. A third: G.S. 42-54 also requires a notice, of a transfer to a new owner, which the opinion does not mention, and we found no decision on whether a willful failure of that notice comes within the sentence.

If your deposit sat in an ordinary account, or the tenant was never told where it was held, the North Carolina tool flags it and still shows the arithmetic for what you entered, but it cannot tell you whether a court would find the failure willful. Whether to claim any deduction at all is then a question for a North Carolina attorney before you send anything.

The Court of Appeals’ reading has limits of its own. Neil was about improper deductions, not a missed deadline, and we found no appellate decision applying its reading to a landlord who was simply late. And the North Carolina Real Estate Commission’s tenant brochure says, in one sentence, that failing to make the accounting forfeits the right to keep any of the deposit. Sending the accounting and the balance by day 30 is the course that holds up under either reading. The deadline guide covers what missing it costs.

Does a missing notice take the deposit outside the Act?

No. Missing the notice does not take the deposit outside the Act (Dobbins v. Paul, 1984).

Who the rule applies to

The provisions of this Article shall apply to all persons, firms, or corporations engaged in the business of renting or managing residential dwelling units, excluding single rooms, on a weekly, monthly or annual basis. N.C. Gen. Stat. § 42-56

A single room is outside the Act. A vacation rental runs on Chapter 42A instead, and there the deposit must be in a trust account with no bond alternative. The Act speaks of those “engaged in the business of renting or managing” dwellings; it does not say whether an owner renting out one house is in that business, and we found no appellate decision that construes the phrase. This tool treats the Act as applying, which is the cautious course; whether it reaches an owner renting out one house is a question for a North Carolina attorney. Managers are named alongside owners, so a property manager holding the deposit is within it.

Interest on the deposit

North Carolina does not require a landlord to pay the tenant interest on a security deposit. The Act says where the deposit must be held and is silent on interest. Nothing in the seven sections of the Act mentions interest in either direction: it neither requires interest to be paid to the tenant nor says who keeps what a trust account earns.

If a licensed real estate broker holds the deposit, a Real Estate Commission rule adds a condition: trust money may go into an interest-bearing account only with the written authorization of everyone with an interest in it, stating conspicuously how and to whom the interest is paid (21 NCAC 58A .0116(c)).

Selling the property

When the landlord’s interest in the unit ends, by sale, assignment, death, appointment of a receiver or otherwise, the landlord or the landlord’s agent has 30 days to do one of two things: transfer what remains of the deposit to the successor and then notify the tenant by mail of the transfer and of the transferee’s name and address, or return it to the tenant.

Upon termination of the landlord's interest in the dwelling unit in question, whether by sale, assignment, death, appointment of receiver or otherwise, the landlord or his agent shall, within 30 days, do one of the following acts, either of which shall relieve him of further liability with respect to such payment or deposit: (1) Transfer the portion of such payment or deposit remaining after any lawful deductions made under this section to the landlord's successor in interest and thereafter notify the tenant by mail of such transfer and of the transferee's name and address; or (2) Return the portion of such payment or deposit remaining after any lawful deductions made under this section to the tenant. N.C. Gen. Stat. § 42-54

Either act relieves the former landlord of further liability for the deposit, so on its words a seller who does neither is not relieved. The notice must go by mail, and it comes after the transfer. The remedy section names “the landlord or the landlord’s successor in interest” as the party a tenant may sue for the accounting and the balance; the Act does not say whether that reaches a buyer who never received the money, and we found no appellate decision applying either section to a sale.

Check how your deposit was held

The free North Carolina deposit tool asks two questions about the start of the tenancy: where the deposit was held, and whether the tenant was told where within 30 days of the lease starting. It works out your 30-day deadline and generates a statute-cited return letter, all in your browser with nothing stored. What may come out of the deposit is in the deductions guide.

North Carolina security deposit trust accounts: common questions

Can a North Carolina landlord keep a security deposit in a regular bank account?

G.S. 42-50 requires a trust account with a licensed and federally insured depository institution or a trust institution authorized to do business in North Carolina, or instead a bond from an insurance company licensed in the State. The Act does not define a trust account; the North Carolina Real Estate Commission describes one as a bank account designated "trust" or "escrow" that holds none of the landlord’s or broker’s own money, and an ordinary personal or business account that also holds the landlord’s own money does not fit that description. (N.C. Gen. Stat. § 42-50)

Does a North Carolina landlord have to tell the tenant in writing where the deposit is held?

The statute does not say "in writing". It requires the landlord or the landlord’s agent to tell the tenant, within 30 days after the beginning of the lease term, the name and address of the bank or institution where the deposit is currently located, or the name of the insurance company providing the bond. The North Carolina Real Estate Commission’s tenant brochure says the notice is in writing, and a written notice is the easiest kind to prove. The simplest way to meet the deadline and the content is to put them in the lease. (N.C. Gen. Stat. § 42-50)

What happens if a North Carolina landlord does not keep the deposit in a trust account?

A willful failure of the deposit, bond or notice requirements voids the landlord’s right to keep any portion of the deposit, even for unpaid rent or real damage, and the North Carolina Court of Appeals has held those requirements are the ones in G.S. 42-50 (Neil v. Kuester Real Estate Services, 2014). The Act does not define "willful", and we found no North Carolina appellate decision on what a tenant must show to prove it. What is voided is the right to retain money from the deposit; the Act does not say the underlying debt is extinguished, and we found no appellate decision on whether a landlord in that position can still sue separately for unpaid rent or damage. (N.C. Gen. Stat. §§ 42-50, 42-55)

Does a North Carolina landlord have to pay interest on a security deposit?

No. The Tenant Security Deposit Act says where the deposit must be held and is silent on interest: it neither requires interest to be paid to the tenant nor says who keeps what the trust account earns. Where a licensed real estate broker holds the deposit, a Real Estate Commission rule lets trust money go into an interest-bearing account only with the written authorization of everyone with an interest in it, stating how and to whom the interest is paid. (N.C. Gen. Stat. § 42-50; 21 NCAC 58A .0116(c))

Does the North Carolina trust account rule apply to a landlord with one rental house?

The Act does not say. It applies to those "engaged in the business of renting or managing" residential dwelling units, and it does not say whether an owner renting out one house is in that business; we found no appellate decision that construes the phrase. This tool treats the Act as applying, which is the cautious course. Managers are named alongside owners, so a property manager holding the deposit is within it. (N.C. Gen. Stat. § 42-56)

What happens to the security deposit when a North Carolina rental property is sold?

When the landlord’s interest in the unit ends, by sale, assignment, death, appointment of a receiver or otherwise, the landlord or the landlord’s agent has 30 days to do one of two things: transfer what remains of the deposit to the successor and then notify the tenant by mail of the transfer and of the transferee’s name and address, or return it to the tenant. Either act relieves the former landlord of further liability for the deposit, so on its words a seller who does neither is not relieved. (N.C. Gen. Stat. § 42-54)

Sources

• N.C. Gen. Stat. § 42-50: the trust account, the bond and the notice
• N.C. Gen. Stat. § 42-55: the forfeiture sentence and the other remedies
• Neil v. Kuester Real Estate Servs., Inc., 237 N.C. App. 132, 764 S.E.2d 498 (2014) (N.C. Court of Appeals): forfeiture confined to G.S. 42-50
• Dobbins v. Paul, 71 N.C. App. 113 (1984): a missing notice and the Act
• N.C. Real Estate Commission, "Questions and Answers on: Tenant Security Deposits" (REC 3.24, 7/1/19) (agency brochure, not law): trust accounts, the written notice, a change of bank
• 21 NCAC 58A .0116, handling of trust money by real estate brokers: interest-bearing trust accounts held by brokers
• N.C. Gen. Stat. § 42-56: who the Act applies to
• N.C. Gen. Stat. § 42A-18(a): vacation rentals
• N.C. Gen. Stat. § 42-54: selling the property
• The North Carolina security deposit tool and full cited rules

About this page

Every quoted passage above comes from the same rules the North Carolina tool runs on. The statutes are on an automated weekly watch. Where a sentence gives our reading rather than the text, it says so, and where it relies on a court or on the Real Estate Commission, it names which. How we verify the law explains the process. This is general information that cites the law, not legal advice, and Orygn LLC is not a law firm. For advice about your situation, talk to a licensed North Carolina attorney.