Security Deposit Interest by State: Complete Compliance Guide

If you're a landlord collecting security deposits, you might owe your tenants interest—and failure to comply can cost you 2-3x the deposit amount plus statutory fines of $500-$5,000.

14 states currently require landlords to pay interest on security deposits: Connecticut, Illinois, Iowa, Maryland, Massachusetts, Minnesota, New Hampshire, New Jersey, New Mexico, New York, North Dakota, Ohio, Pennsylvania, and Virginia.

Interest rates range from 0.5% to 5% annually, with specific rules on separate accounts, payment timing, and tenant notification.

This comprehensive guide covers every state's requirements, shows you how to calculate interest owed, explains compliance procedures, and reveals the steep penalties for violations.

Quick Summary: Which States Require Interest?

| State | Required? | Interest Rate | Payment Timing | |-------|-----------|---------------|----------------| | Connecticut | ✅ Yes | 1.5% minimum or market rate | Annual or move-out | | Illinois | ✅ Yes | Bank passbook rate (~0.5%) | Annual if >6 months | | Iowa | ✅ Yes | 5% annually | At move-out | | Maryland | ✅ Yes | 3-4% (based on units) | Every 6 months | | Massachusetts | ✅ Yes | 5% or actual interest | Annual | | Minnesota | ✅ Yes | 1% simple interest | Annual | | New Hampshire | ✅ Yes | Passbook rate | Annual | | New Jersey | ✅ Yes | Market rate or actual | Annual | | New Mexico | ✅ Yes | Passbook rate | Annual | | New York | ✅ Yes | Prevailing rate (1-2%) | Annual | | North Dakota | ✅ Yes | 5% or market rate | Annual | | Ohio | ✅ Yes | 5% or actual interest | Annual | | Pennsylvania | ✅ Yes | 3% (if deposit >$100) | Annual | | Virginia | ✅ Yes | 1% (if deposit >$50) | Annual | | All Other States | ❌ No | N/A | N/A |

Use Our Free Calculator

Calculate your exact interest owed using our interactive tool. Select your state, enter deposit amount and rental period, and get instant results with compliance requirements.

1. How Security Deposit Interest Works

The Basic Formula

Security deposit interest uses simple interest calculation:

Interest = Principal × Rate × Time

Example:

• Deposit: $2,000
• Rate: 3% annually
• Time: 12 months (1 year)
• Interest: $2,000 × 0.03 × 1 = $60

Monthly Accrual

Interest accrues monthly based on the annual rate:

• Annual rate: 3%
• Monthly rate: 3% ÷ 12 = 0.25%
• Monthly interest: $2,000 × 0.0025 = $5.00

After 12 months: $5.00 × 12 = $60.00

Proration for Partial Years

If tenant moves out mid-year, prorate the interest:

Example: $2,000 deposit, 3% rate, 7 months tenancy

• Interest: $2,000 × 0.03 × (7/12) = $35.00

Most states require proration to the day or month.

2. State-by-State Requirements

High-Rate States (5%)

Iowa

• Rate: 5% annually
• Separate Account: Not required
• Payment: At move-out
• Max Deposit: 2 months' rent
• Special Rules: Interest accrues from date deposit received

Massachusetts

• Rate: 5% annually OR actual interest earned (whichever is higher)
• Separate Account: Required (in Massachusetts bank)
• Payment: Annual, within 30 days of anniversary
• Max Deposit: 1 month's rent
• Special Rules: Must provide bank name, account number, and amount of interest within 30 days

North Dakota

• Rate: Market rate OR 5% if not in interest-bearing account
• Separate Account: Not required
• Payment: Annual
• Max Deposit: 1 month's rent (pets extra up to $2,500)
• Special Rules: Landlord keeps first $35 of interest; tenant receives remainder

Ohio

• Rate: 5% per year OR actual interest earned
• Separate Account: Not required
• Payment: Annual or upon termination
• Max Deposit: No limit
• Special Rules: Only applies to leases >6 months

Moderate-Rate States (1-3%)

Connecticut

• Rate: Reasonable market rate (minimum 1.5%)
• Separate Account: Required
• Payment: Annual or at move-out
• Max Deposit: 2 months' rent
• Special Rules: Must notify tenant of bank and account within 30 days

Maryland

• Rate: 3% simple interest (<50 units) or 4% (50+ units)
• Separate Account: Required (Maryland bank)
• Payment: Every 6 months
• Max Deposit: 2 months' rent
• Special Rules: Must provide receipt with bank name/address

Minnesota

• Rate: 1% simple interest annually
• Separate Account: Not required
• Payment: Annual, credited to rent or paid directly
• Max Deposit: No limit
• Special Rules: Required only if deposit held >6 months

Pennsylvania

• Rate: 3% annually (if deposit >$100)
• Separate Account: Required (escrow account)
• Payment: Annual
• Max Deposit: 2 months' first year, 1 month thereafter
• Special Rules: During first year, tenant not entitled to interest; begins second year

Virginia

• Rate: 1% annually (if deposit >$50)
• Separate Account: Required
• Payment: Annual
• Max Deposit: 2 months' rent
• Special Rules: Applies to leases >13 months; tenant must request interest in writing

Market-Rate States

Illinois

• Rate: Bank passbook rate (typically 0.25-0.5%)
• Separate Account: Required (Illinois bank)
• Payment: Annual for leases >6 months
• Max Deposit: No statutory limit
• Special Rules: Properties with 6+ units in Chicago have stricter rules

New Hampshire

• Rate: Passbook savings account rate
• Separate Account: Required
• Payment: Annual
• Max Deposit: 1 month's rent or $100 (whichever is greater)
• Special Rules: Landlord may deduct $30 admin fee annually

New Jersey

• Rate: Market rate OR actual interest earned
• Separate Account: Required (NJ or PA bank)
• Payment: Annual
• Max Deposit: 1.5 months' rent
• Special Rules: Must deposit in account within 30 days and provide tenant account info

New Mexico

• Rate: Passbook interest rate
• Separate Account: Required
• Payment: Annual
• Max Deposit: 1 month's rent (pets extra)
• Special Rules: Must provide receipt with bank info within 30 days

New York

• Rate: Prevailing rate (typically 1-2%)
• Separate Account: Required (NY bank)
• Payment: Annual
• Max Deposit: 1 month's rent
• Special Rules: Only for buildings with 6+ units; NYC has additional rules

3. Compliance Requirements

Account Requirements

If Separate Account Required:

1. Open Interest-Bearing Account

   • At federally insured bank or savings institution
   • Located in state where property is located (if required)
   • Clearly labeled as security deposit account
   • Do NOT commingle with personal/operating funds

2. Documentation

   • Keep bank statements for each account
   • Maintain deposit receipts
   • Track interest earned monthly
   • Keep records for at least 5 years

Notification Requirements

Within 30 Days of Move-In (Typical):

1. Provide Written Notice Including:

   • Bank name and address
   • Account number (some states)
   • Interest rate
   • Amount of deposit held
   • How interest will be paid

2. Annual Statements (If Required):

   • Interest earned during period
   • Method of payment (credit to rent or direct payment)
   • Updated account information

3. Lease Agreement:

   • Include clause about security deposit interest
   • State the interest rate
   • Explain payment timing
   • Reference state law requirements

Payment Requirements

Payment Methods:

1. Direct Payment

   • Check or money order to tenant
   • Electronic transfer
   • Cash with receipt

2. Credit to Rent

   • Reduce next month's rent by interest amount
   • Provide written notice of credit applied

3. At Move-Out

   • Include interest with deposit refund
   • Itemize interest separately on return statement

Timing:

• Annual: Within 30 days of lease anniversary (most states)
• Semi-Annual: Every 6 months (Maryland)
• At Move-Out: With deposit refund (some states allow)

4. Penalties for Non-Compliance

Common Violations

1. Failure to Pay Interest

   • Most serious violation
   • Can forfeit right to keep any deposit
   • Subject to statutory damages

2. No Written Notification

   • Failure to provide bank information
   • Missing interest rate disclosure
   • No annual statements

3. Wrong Interest Rate

   • Paying less than required rate
   • Using arbitrary percentage
   • Not tracking actual bank interest

4. Late Payment

   • Missing annual payment deadline
   • Delaying interest payment at move-out

5. No Separate Account

   • Commingling deposit funds
   • Not using required state bank
   • Using non-interest-bearing account

6. Poor Documentation

   • Missing deposit receipts
   • No interest calculation records
   • Inadequate bank statements

Typical Penalties by State

Statutory Damages:

• Double Deposit: Connecticut, Maryland, Virginia
• Triple Deposit: New Jersey (bad faith), Massachusetts
• Specific Amounts: $500-$5,000 depending on violation

Additional Consequences:

• Attorney Fees: Tenant recovers all legal costs
• Court Costs: Landlord pays tenant's court expenses
• Loss of Deposit Rights: Can't keep any portion for damages
• Interest on Judgment: Additional interest during lawsuit
• Bad Faith Penalties: Extra damages for intentional violations

Real-World Examples

Case 1: Illinois Landlord

• Deposit: $1,800
• Held: 2 years without paying interest
• Interest owed: ~$18
• Penalty: Lost entire $1,800 deposit right + $2,000 statutory damages + $3,500 attorney fees = $7,300 loss over $18 interest

Case 2: New Jersey Landlord

• Deposit: $2,500
• No separate account, no notification
• Penalty: Triple damages ($7,500) + $4,200 attorney fees = $11,700 total

Case 3: Massachusetts Landlord

• Deposit: $2,200
• Used non-MA bank, wrong interest rate
• Penalty: Triple damages ($6,600) + $5,000 attorney fees + lost deposit rights = $11,600 total

5. Best Practices for Compliance

Set Up Proper Systems

1. Separate Account Management

✅ Open dedicated interest-bearing account
✅ Use state-required bank (if applicable)
✅ Track deposits and interest monthly
✅ Never commingle with operating funds
✅ Maintain detailed records

2. Automated Interest Tracking

✅ Use property management software
✅ Set calendar reminders for annual payments
✅ Create interest calculation spreadsheet
✅ Track lease anniversaries
✅ Generate annual statements automatically

3. Document Everything

✅ Written deposit receipt with bank info
✅ Lease clause about interest
✅ Annual interest payment confirmations
✅ Move-out settlement including interest
✅ Keep records 5+ years

Lease Agreement Language

Sample Clause:

"Security Deposit Interest: Landlord shall pay Tenant interest on the security deposit at a rate of [X%] per year, as required by [State] law. Interest will be paid [annually/at move-out] by [method]. The security deposit is held at [Bank Name], [Address], in a separate interest-bearing account."

Annual Payment Process

60 Days Before Anniversary:

1. Calculate interest owed
2. Prepare payment/credit memo
3. Send notice to tenant

30 Days Before Anniversary:

1. Process payment or rent credit
2. Provide receipt/confirmation
3. Update records

At Anniversary:

1. Payment completed
2. Documentation filed
3. Next year reminder set

Move-Out Settlement

Include in Final Statement:

Security Deposit:              $2,000.00
Interest Earned (3% × 1 year):    $60.00
Total to be Returned:          $2,060.00

Less Deductions:
- Carpet cleaning:               -$150.00
- Wall repairs:                  -$200.00

Final Amount Due to Tenant:    $1,710.00

6. State-Specific Quirks and Special Rules

Massachusetts

• Must use Massachusetts bank
• First $30 of interest goes to tenant, remainder subject to landlord keeping $30 admin fee
• Triple damages for bad faith violations
• Tenant can request inspection before move-out

Maryland

• Different rates based on number of units (<50 vs 50+)
• Payment every 6 months (unusual)
• Must provide written receipt with specific information
• Separate bank account in Maryland required

New York

• Only applies to buildings with 6+ units
• NYC has additional interest requirements
• Rent-stabilized units have different rules
• Co-ops and condos may be exempt

Ohio

• Only for leases >6 months
• Tenant must request interest in writing
• 5% OR actual interest (tenant's choice)
• No separate account required

Pennsylvania

• First year: No interest owed
• Second year: Interest starts accruing
• Must be in escrow account
• After 2 years, tenant has right to interest

Virginia

• Only applies to leases >13 months
• Tenant must request interest in writing
• If not requested, landlord keeps interest
• 1% only on deposits >$50

7. Voluntary Interest Payment (Non-Required States)

Why Pay Interest When Not Required?

Benefits:

1. Attract Quality Tenants

   • Competitive advantage in tight markets
   • Shows professionalism
   • Builds goodwill

2. Tenant Retention

   • Annual "bonus" encourages lease renewal
   • Reduces turnover costs
   • Happy tenants stay longer

3. Simplify Accounting

   • Easier to track across multi-state portfolio
   • Consistent policies
   • Professional bookkeeping

Recommended Rate: 1-2% if voluntarily offering

How to Implement

1. Add to Lease: "Landlord voluntarily pays 1.5% annual interest on security deposits as a goodwill gesture."

2. Payment Method:

   • Annual credit to rent OR
   • Payment with deposit refund

3. Documentation:

   • Keep same records as required states
   • Provide annual statements
   • Build positive tenant relationship

8. Multi-State Portfolio Management

Challenges

If you own properties in multiple states:

1. Different rates (0.5% to 5%)
2. Different payment timing (annual vs semi-annual vs move-out)
3. Different account requirements (separate vs commingled)
4. Different notification rules
5. Different maximum deposit limits

Solutions

1. Property Management Software

• Tracks state-specific requirements
• Automates interest calculations
• Generates required notices
• Maintains compliance records

Recommended Tools:

• Buildium (handles multi-state)
• Appfolio (automated compliance)
• TenantCloud (free tier available)

2. Separate Accounts per State

Illinois Properties → Illinois Bank Account
New York Properties → New York Bank Account
California Properties → No interest account needed

3. Standardized Procedures

• Create compliance checklist for each state
• Set calendar reminders
• Use templates for notifications
• Annual audit of all deposits

4. Consult Local Attorneys

• Verify current rates annually
• Review lease clauses
• Understand local variations
• Get advice on gray areas

9. Common Mistakes and How to Avoid Them

Mistake #1: "I Didn't Know"

Problem: Ignorance of law is not a defense Solution: Research requirements before collecting deposits

Mistake #2: Using Wrong State

Problem: Property in NY, landlord banks in CA Solution: Use bank in state where property located

Mistake #3: Calculating Interest Wrong

Problem: Using compound instead of simple interest Solution: Simple interest formula: Principal × Rate × Time

Mistake #4: Missing Deadlines

Problem: Paying interest 45 days after anniversary (30 days required) Solution: Set calendar reminders 60 days in advance

Mistake #5: No Written Documentation

Problem: Verbal agreement to pay interest Solution: Everything in writing, always

Mistake #6: Assuming Local Laws Don't Apply

Problem: State allows X but city requires Y Solution: Check city/county ordinances in addition to state

Mistake #7: Using Same Rate for All Tenants

Problem: Rate changed mid-year, some tenants getting old rate Solution: Track rate in effect when each deposit collected

Mistake #8: Not Returning Interest at Move-Out

Problem: Only returning principal deposit Solution: Calculate and include all accrued interest

10. Future Trends and Legislative Changes

States Considering Interest Requirements

Potential Additions (Under Discussion):

• Washington State (proposed 2% requirement)
• California (local jurisdictions pushing statewide law)
• Colorado (Denver considering city ordinance)

Increasing Rates

Trend: Some states raising interest rates to match inflation

• Maryland considering increase to 5%
• New York pressure to raise from current 1-2%

Technology Requirements

New Rules:

• Electronic notification acceptable
• Digital payment methods required
• Online account access for tenants

Consumer Protection Focus

Legislative Priorities:

• Stricter penalties for non-compliance
• Annual audit requirements
• Mandatory landlord education on deposit laws

FAQ: Security Deposit Interest

Do I have to pay interest on security deposits?

It depends on your state. 14 states require interest: CT, IL, IA, MD, MA, MN, NH, NJ, NM, NY, ND, OH, PA, and VA. All other states do not require interest, but you can voluntarily pay it. Check local city/county laws as some jurisdictions have requirements beyond state law.

What interest rate should I pay?

Use the rate specified by your state law:

• High-rate states: 5% (IA, MA, ND, OH)
• Moderate states: 1-3% (CT, MD, MN, PA, VA)
• Market-rate states: Bank passbook or prevailing rate (IL, NH, NJ, NM, NY)

For voluntary payment in non-required states, 1-2% is reasonable.

When do I have to pay the interest?

Payment timing varies by state:

• Annual: Most states require yearly payment within 30 days of lease anniversary
• Semi-annual: Maryland requires payment every 6 months
• At move-out: Some states allow paying all interest with final deposit refund
• Tenant choice: A few states let tenant choose timing

Do I need a separate bank account?

11 of 14 states require separate accounts: CT, IL, MA, MD, NH, NJ, NM, NY, PA, VA require deposits in separate interest-bearing accounts. IA, MN, ND, OH do not require separate accounts. Always check your specific state law.

What happens if I don't pay required interest?

Penalties are severe:

• 2-3x deposit amount in statutory damages
• $500-$5,000 in fines
• Tenant recovers attorney fees and court costs
• Loss of right to keep any portion of deposit
• Additional bad faith penalties if intentional

The cost of non-compliance far exceeds the interest owed.

Can I deduct administrative fees from the interest?

Some states allow small admin fees:

• New Hampshire: $30 annual admin fee
• North Dakota: Landlord keeps first $35 of interest
• Most states: No deductions allowed

Never deduct fees unless explicitly permitted by state law.

What if the tenant breaks the lease early?

Interest accrues until deposit is returned. If tenant breaks lease:

1. Calculate interest through actual move-out date
2. Prorate for partial year/month
3. Include interest in final settlement
4. Deduct any damages/unpaid rent as usual
5. Return deposit + interest minus deductions

Do I pay interest on pet deposits?

Usually yes, if state requires deposit interest. Pet deposits are typically treated the same as security deposits. However, non-refundable pet fees (not deposits) do not earn interest since they're not returned.

What about last month's rent held in advance?

Depends on state classification:

• If classified as "deposit": Interest required
• If classified as "advance rent": Usually no interest
• Varies by state law

Check your state's specific treatment of last month's rent.

How do I calculate interest for partial years?

Prorate based on actual days held:

Formula: Principal × Rate × (Days Held / 365)

Example: $2,000 deposit, 3% rate, 7 months (213 days)

• Interest: $2,000 × 0.03 × (213/365) = $35.01

Most states require proration to the day or month.

Conclusion: Compliance is Cheaper Than Penalties

Security deposit interest requirements exist in 14 states with rates from 0.5% to 5% and strict compliance rules.

Key Takeaways:

1. Know your state's requirements - Don't assume you're exempt
2. Set up proper systems - Separate accounts, documentation, reminders
3. Pay on time - Annual payments within required timeframe
4. Document everything - Written notices, receipts, records
5. Penalties are severe - 2-3x deposit + fines + attorney fees
6. Check local laws - Cities/counties may have additional requirements

The interest owed is minimal (typically $20-100/year per deposit), but the penalties for non-compliance are massive ($5,000-15,000+ per violation).

Use our Security Deposit Interest Calculator to calculate your exact obligations and ensure compliance.

Related Resources

• Security Deposit Interest Calculator - Calculate exact interest owed by state
• Move-In/Move-Out Inspection Checklist - Document property condition
• Tenant Screening Checklist - Find quality tenants
• State Legal Guides - State-by-state landlord laws
• Eviction Cost Calculator - Understand eviction expenses

Disclaimer: This guide is for educational purposes only and does not constitute legal advice. Security deposit laws vary by state and change frequently. Always consult with a local attorney to ensure compliance with current laws in your jurisdiction.

Last updated: January 17, 2026