Do landlords have to pay interest on security deposits? That depends on where the rental property is located. Let’s take a closer look.
A security deposit is any amount of money a tenant pays to a landlord beyond the first month’s rent and other move-in fees. It is usually equal to one month’s rent but could also be higher or lower, depending on the landlord, property, and state. When a tenant pays a security deposit, the landlord or property management company may be required to pay interest on the deposit. The law varies by state, so we advise you to check with your local and state agencies to comply with the law as a landlord. In addition, you should include details of the security deposit interest policy in your lease.
Collecting Interest on Security Deposits: The Basics
In states with no laws requiring landlords to pay interest on security deposits, landlords are not required to do so (although some choose to). In states that do require landlords to pay interest on security deposits, landlords must follow a set of rules—some of which are specific to their region.
These rules state that interest must be paid on any security deposit or prepaid rent from the beginning of the rental term. As the landlord, you must keep track of how much interest accumulates and give it back when they return the deposit at the end of the tenancy.
If you fail to pay interest on a tenant’s security deposit, then you must return twice as much money when you finally pay it back. For this reason, you need to be up-to-date on all applicable laws in your state to avoid any costly penalties when a resident moves out.
If you are not sure about the laws in your state, read more below. While each state’s detailed policies are unique, we’ve created an at-a-glance sheet to show you which states require you to collect interest on security deposits and which do not.
States Without Security Deposit Interest Payment Requirements
- New Hampshire
- North Carolina
- North Dakota
- Rhode Island
- South Carolina
- South Dakota
- West Virginia
Some of these states will require you to hold the money in an escrow account or create surety bonds, but they do not require you to pay any accrued interest to your tenants.
States with Security Deposit Interest Requirements
If you’re renting out a property in any of the following states, you’ll need to place your security deposits into an escrow account that accrues interest. In many cases, you’ll need to pay the interest to your residents monthly or annually.
- District of Columbia
- New Jersey
- New Mexico
- New York
- North Dakota
If you have renters in these states, double-check with your local regulations to learn more about collecting and paying interest on your security deposits. For example, it is only necessary to put the deposit into an interest-bearing account if you are charging more than one month’s rent in Ohio.
Staying Up-to-Date on Local Laws
Each state’s policies regarding interest collection on security deposits vary. While many states require you to place a person’s security deposit into an interest-bearing escrow account, others do not.
In some cases, you’re required to collect interest, but you can pay it to yourself at the end of the rental period. Alternatively, many states require you to pay the interest to the tenants in a timely, routine manner.
If you want to avoid any possible fines or violations, stay informed about your area’s local laws. Knowledge is your best friend when managing security deposits—from how you spend and store them to how you must pay them back.
Some laws may apply to security deposits only over a certain threshold. This may impact how much you decide to charge before a resident moves in.