Security Deposit Interest Requirements: Which Landlords Must Pay, and How to Comply
Who Must Pay · How the Rate Is Set · Where to Hold It · When It’s Paid · Penalties
In roughly a dozen states plus Washington, D.C. — and in cities like Chicago even where the state itself is silent — a landlord is not merely allowed to hold a tenant’s security deposit; they are legally required to hold it a certain way and pay the tenant interest on it. The interest is often small, sometimes a few dollars a year, but ignoring the requirement is not: deposit statutes routinely award a wronged tenant double or triple the deposit plus attorney fees. This guide names the interest-requiring jurisdictions, explains the three ways a rate gets set, shows where the money must sit and when the interest comes due, lays out the penalties for getting it wrong, and confirms the large group of states with no interest requirement at all — with every figure hedged, because these rates and thresholds change every year.
The trap in this topic is treating “does my state require interest?” as a single yes-or-no. It rarely is. A requirement can turn on how big the deposit is (New Mexico, Ohio), how large the building is (New York, Pennsylvania, Illinois), how long the tenancy has lasted (New Hampshire, North Dakota, D.C., Iowa), or a city ordinance layered on top of state law (Chicago). And the rate itself may be a fixed statutory number, a floating bank rate, or an index a regulator republishes each January. Because of that, the single most important instruction on this page repeats in every section: look up the current rule for your exact state and city, for the exact year, before you rely on any number below.
The short overview video summarizes the landscape; the sections that follow go jurisdiction by jurisdiction — who must pay, at what rate, in what account, on what schedule — then cover compliance steps, penalties, the no-interest states, and how good screening keeps deposit disputes from ever reaching this level of detail.
Deposit Interest at a Glance
Who Must Pay
~13 states plus D.C. & some cities
How Rate Is Set
Fixed, bank-rate, or annual index
Where It’s Held
Often a separate account
Penalty
Often two to three times the deposit
What “Deposit Interest” Actually Means
A security deposit is the tenant’s money, held by the landlord as a stake against unpaid rent or damage. In most of the country a landlord may simply hold it and return what is left at move-out. But a minority of states take the position that because the deposit is the tenant’s money — often the equivalent of one or two months’ rent — the tenant should receive the value it earns while the landlord holds it. In those states the law imposes two linked duties: the deposit must be kept a certain way, and interest on it must be paid to the tenant. The wider deposit framework — caps, deadlines, itemization — is covered in our security deposit laws by state reference.
Those two duties are separate, and that separation catches landlords off guard. Paying the interest correctly does not prove you held the deposit correctly, and holding it in the right account does not prove you paid the interest on the right schedule. A landlord can satisfy one and violate the other, and the violation is what draws the penalty. Throughout this guide the two are treated as distinct: where the deposit sits (a separate, interest-bearing account, sometimes at an in-state bank, never commingled with operating funds) and what the tenant is owed on it (the interest, at the correct rate, on the correct schedule).
Two Requirements, Not One
Many interest states also dictate the holding account — a separate, dedicated, interest-bearing account, frequently at a bank located in that state, kept clear of your own money. Meeting the interest-payment rule does not automatically satisfy the account rule, and vice versa. Confirm both for your state before you collect a single deposit, and keep the paperwork that shows you did.
Takeaway
Deposit interest reflects a simple principle: the deposit is the tenant’s money, so in some states the tenant gets its earnings. Treat the holding account and the interest payment as two separate obligations — you can comply with one and still violate the other.
Which Jurisdictions Require Deposit Interest
The table below lists the states and the District of Columbia that require deposit interest under at least some conditions, with the mechanism each uses. Read it as a map, not a rulebook: the “rate / method” column tells you how the number is found, and the “verify” reminders exist because most of these rates are recalculated or move every year. Where a requirement only applies above a deposit size, above a building size, or after a minimum tenancy, that condition is noted — those thresholds are exactly where landlords wrongly assume they are exempt.
| Jurisdiction | Rate / Method | Key Condition | When Paid |
|---|---|---|---|
| Connecticut | State “deposit index,” recalculated yearly (verify current rate) | Most residential deposits | Annually & at move-out |
| Illinois (statewide) | Bank savings/CD rate, less a permitted admin share (verify current rate) | Landlords with 25+ units, held 6+ months | Annually |
| Chicago (city) | City-published annual rate (verify current rate) | Deposits held 6+ months | Annually |
| Maryland | Greater of a fixed floor or the 1-year Treasury yield, set yearly (verify current rate) | Held in a separate MD account | At move-out |
| Massachusetts | Five percent, or the actual bank rate if lower (verify current rate) | Separate protected account | Annually & at move-out |
| Minnesota | One percent simple interest (verify current rate) | All deposits; sub-one-dollar interest excused | At move-out |
| New Hampshire | The bank savings rate on the account (verify current rate) | Tenancy of about one year or longer | On request & at move-out |
| New Jersey | The rate paid by the bank/money-market account (verify current rate) | Most residential deposits | Annually / on the anniversary |
| New Mexico | The passbook savings rate (verify current rate) | Deposits over one month’s rent, annual leases | Annually |
| New York | Bank rate, less a permitted 1 percent admin fee (verify current rate) | Buildings of 6+ units | Annually / held in trust |
| North Dakota | The interest-bearing account rate (verify current rate) | Tenancy longer than nine months | At move-out |
| Ohio | Five percent on the portion over one month’s rent or a small floor (verify current rate) | Tenancy of six months or longer | Annually |
| Pennsylvania | Bank rate, less a permitted 1 percent admin fee (verify current rate) | Buildings of 25+ units, from month 25 | Annually after year two |
| Washington, D.C. | The statement savings rate on the escrow account (verify current rate) | Tenancy of twelve months or longer | At move-out |
| Iowa (conditional) | Interest to tenant only if held in an interest account (verify) | Tenancy longer than five years | At move-out |
Read This Table as a Starting Point, Not a Rate Sheet
Nearly every rate above is either recalculated by a regulator each year or floats with a bank’s savings rate, so a number that is correct this year is often wrong the next. Building-size, deposit-size, and tenancy-length thresholds also get amended. Before you calculate or pay anything, pull your state’s current statute or your city’s current published rate and confirm the figure for the year in question. Do not rely on a rate you memorized last year.
The Three Ways a Rate Gets Set
Every interest state uses one of three mechanisms to fix the rate. Knowing which one your state uses tells you where to look for the current number and how often it moves.
1. A Fixed Statutory Rate
The simplest kind: the statute names a percentage. Minnesota sets one percent simple, non-compounding interest on essentially all deposits. Ohio references five percent, applied to the portion of a deposit above one month’s rent (or a small dollar floor) once the tenant has stayed six months. Massachusetts uses five percent as a ceiling — the tenant gets five percent or the actual rate the bank paid, whichever is lower. A fixed rate is easy to apply but still worth re-checking, because legislatures do amend these numbers; treat the percentage as “verify current” rather than permanent.
2. A Floating Bank Rate
Here the statute does not name a number; it points at the account. The tenant is owed whatever the bank actually paid on the account holding the deposit. New Hampshire ties the rate to the regular savings rate at the New Hampshire institution where the deposit sits. New Jersey uses the rate paid by the bank or money-market account it requires. Washington, D.C. uses the statement savings rate at the D.C. institution holding the escrow, re-read each January and July. Because the number tracks the market, in a low-rate environment it can be a fraction of a percent; in a higher-rate environment it rises. You confirm it by reading the bank’s rate, not a statute.
3. An Annual Index a Regulator Publishes
The third kind centralizes the rate. A state agency computes a single figure each year and everyone uses it. Connecticut’s banking commissioner announces a “deposit index” every year that governs rental-deposit interest statewide. The City of Chicago publishes an annual security-deposit interest rate that all covered leases must use, and requires the current-year rate summary to accompany the lease. Maryland sets its rate as the greater of a statutory floor or the one-year Treasury yield as of the first business day of the year — a formula recomputed annually. For these, the source of truth is the regulator’s current-year announcement, not last year’s paperwork.
Takeaway
A deposit-interest rate is always one of three things: a fixed statutory percentage, a floating bank rate, or an annual index a regulator republishes. Identify which your state uses, then confirm the current-year number from the statute, the bank statement, or the regulator’s announcement — whichever governs.
Where the Deposit Must Be Held
In most interest states the rate rule travels with an account rule, and the account rule is often the stricter of the two. The recurring theme is separation: the deposit may not be mixed with your operating cash or personal funds, and in several states it must sit in a dedicated, interest-bearing account, frequently at a bank located in that state. Our security deposit rules and screening tips guide covers the practical account and record-keeping side.
Maryland requires deposits to be held in a federally insured Maryland institution, in accounts devoted exclusively to security deposits that bear interest. Massachusetts requires a separate account, held so the funds are protected from the landlord’s creditors, with the account clearly identifying the money as the tenant’s. New Jersey requires the deposit to be invested or placed in a qualifying account and the tenant notified of the bank name, account type, and current rate within a set window after receipt. Washington, D.C. requires an interest-bearing escrow account at a District institution. New York requires deposits for buildings of six or more units to sit in an interest-bearing account in a New York banking organization, held in trust for the tenant.
Commingling Is Its Own Violation
Mixing security deposits with your operating or personal money is prohibited in many states regardless of the interest question, and in some it forfeits your right to make deductions at all. Even where no separate account is legally required, keeping deposits in their own account is the cleanest way to track balances, calculate interest, and prove compliance if a dispute arises. The disclosure that usually accompanies the account rule — telling the tenant in writing where the deposit is held — is a small step that heads off a large class of complaints.
When the Interest Must Be Paid
Timing splits into two broad models, and several states use both. Getting the schedule wrong is as much a violation as getting the rate wrong, so it deserves the same care.
Annual Payment During the Tenancy
Some states require the interest to be paid or credited every year, typically on the lease anniversary. New Jersey requires the interest to be paid to the tenant in cash or credited toward rent on the lease renewal or anniversary. Chicago requires interest on deposits held more than six months to be paid within thirty days after the end of each twelve-month rental period. Under the annual model, each year’s interest comes due on schedule; skipping years quietly accumulates a liability that surfaces — with penalties — at move-out.
Payment at Move-Out
Other states let the interest ride until the tenancy ends and require it as part of the final security-deposit accounting. Maryland pays accrued interest with the deposit within its return window after the tenancy ends. North Dakota pays the accrued interest at the end of the lease for tenancies past the threshold. Under the move-out model the interest is computed once, for the whole tenancy, and returned with the principal — but it must actually be calculated and itemized, not simply forgotten.
Both — Annual and at Move-Out
Massachusetts illustrates the combined model: interest is paid at the end of each year of the tenancy, with a receipt, and reconciled again at move-out. When your state uses both, you owe the yearly payment and a final accounting; doing only one is not compliance.
A Minimum-Tenancy Threshold Decides Whether Any Interest Is Owed
Several statutes only switch on once the tenancy reaches a set length — roughly a year in New Hampshire and Washington, D.C., more than nine months in North Dakota, six months in Ohio, and more than five years in Iowa. Below the threshold, no interest is owed even in a state that otherwise requires it. Where interest does accrue, it usually runs from the day you received the deposit, so the threshold decides whether interest is payable, not from what date it counts. Confirm both the threshold and the accrual start date in your statute.
How to Comply, Step by Step
Compliance is procedural, and the procedure is the same shape everywhere even though the numbers differ. Follow these steps for each tenancy and keep the paper.
Confirm whether interest applies to this tenancy
Check your state and city statute against the deposit size, the building size, and the expected tenancy length. Note the current-year rate and the account requirement. If a threshold might be crossed later, plan for it now.
Open the correct account before collecting the deposit
If your state requires a separate, interest-bearing, or escrow account — often at an in-state bank — set it up first. Never deposit tenant funds into your operating or personal account.
Give the tenant the required written disclosure
Many states require you to tell the tenant, in writing at or near move-in, where the deposit is held — the bank name, account type, and sometimes the rate or account number. Deliver it on time and keep a copy.
Calculate and pay interest on the required schedule
If annual payment is required, compute the interest each anniversary using that year’s correct rate and pay it or credit it toward rent per your state’s rules. If it is a move-out state, track the accrual so you can compute it correctly at the end.
Reconcile at move-out
Calculate any remaining unpaid interest, add it to the itemized deposit accounting, and return both the principal and the accrued interest within your state’s return deadline.
Document every figure and every payment
Keep the deposit amount, account details, each year’s rate, every calculation, every payment, and all deposit communications. If a dispute reaches a court, this record is the difference between winning and paying a multiple-of-deposit penalty.
Takeaway
Compliance is a routine, not a guess: confirm the rule, open the right account, disclose in writing, pay on schedule at the correct rate, reconcile at move-out, and document everything. The paper trail is what protects you if the tenant later claims a violation.
Penalties for Getting It Wrong
The reason deposit interest deserves attention out of proportion to its dollar value is the penalty structure. Deposit statutes typically treat a procedural violation harshly, and the penalty is usually a multiple of the whole deposit — not the interest — plus the tenant’s attorney fees. In several states a violation also strips the landlord’s right to keep any of the deposit for legitimate damages. If a tenant challenges your interest handling, our guide on how to handle a security deposit dispute walks through the response.
| Jurisdiction | Typical Penalty for a Deposit Violation (verify current) |
|---|---|
| Massachusetts | Up to three times the deposit, plus interest and attorney fees |
| Connecticut | Up to twice the deposit, plus attorney fees |
| New Jersey | Double damages, plus attorney fees |
| New York | Up to double the deposit for willful violations |
| Chicago (Illinois) | Twice the deposit, plus the interest owed and attorney fees |
| Maryland | Up to three times the withheld amount, plus attorney fees |
The Interest Is Small; the Penalty Is Not
In a low-rate year the interest owed on a typical deposit can be only a few dollars. But in a state like Massachusetts, failing to comply can expose the landlord to three times the deposit plus attorney fees — even where the landlord would otherwise have been entitled to keep part of the deposit for real damages. A few dollars of unpaid interest can become thousands of dollars of penalty. That asymmetry is the whole reason to take the rule seriously.
States With No Interest Requirement — Which Still Have Strict Rules
The majority of states do not require a landlord to pay interest on a security deposit. California and Texas are the two most populous examples: neither has a statewide interest statute. A number of states that once required interest have repealed it — Virginia, for instance, no longer requires interest on ordinary residential deposits, permitting it only where the landlord and tenant agree. But “no interest requirement” is not “no rules.” Every state, interest or not, regulates deposits in ways that carry their own penalties.
Return Deadlines
Nearly every state sets a firm window — commonly two to four weeks after move-out — to return the deposit or an itemized statement. Miss it and you can forfeit deductions or owe a penalty, entirely apart from any interest question.
Itemization Requirements
Most states require a written, itemized statement of any deductions, often with receipts or repair estimates. Failing to itemize is frequently treated the same as wrongfully withholding the deposit — the same penalties apply.
Deposit Caps
Many states limit how much you may collect, commonly one to a few months’ rent. Collecting over the cap can void the excess and expose you to a penalty. See the deposit laws by state page for the current caps.
Separate-Account and Anti-Commingling Rules
Some no-interest states still forbid commingling deposits with your own funds, and a few require a separate account regardless of interest. Keeping deposits separate is good practice even where it is not mandated.
Local Ordinances Override the “No Requirement” Answer
Even in a state with no statewide interest rule, a city can impose one. Chicago is the clearest example: Illinois has no general statewide interest requirement for smaller landlords, yet Chicago requires deposit interest at a city-published annual rate. Before you conclude your state’s silence lets you off the hook, check your city and county rules too.
✓ Safe Practices Everywhere
- Hold every deposit in a separate account, even where not required.
- Give the tenant a written record of the deposit and, where required, where it is held.
- Return the deposit and any itemized deductions within the state deadline.
- Re-check the current-year rate and rules for your state and city each year.
✕ Mistakes That Trigger Penalties
- Assuming “no state interest rule” means no city rule either.
- Commingling deposits with operating or personal funds.
- Skipping the annual interest payment and hoping to true it up later.
- Using last year’s rate on an index or bank-rate that has moved.
Takeaway
No interest requirement does not mean no rules. California, Texas, and most states still enforce return deadlines, itemization, deposit caps, and anti-commingling rules with real penalties — and a city ordinance can impose interest even where the state does not.
The Best Deposit Dispute Is the One That Never Happens
Deposit fights are far rarer with well-screened tenants. Run comprehensive credit, criminal, and eviction-history checks on every applicant before you sign — the surest way to avoid deposit and damage disputes later.
Frequently Asked Questions
Which states require landlords to pay interest on a security deposit?
Roughly a dozen states plus the District of Columbia require interest under some conditions: Connecticut, Illinois (statewide only for landlords with 25 or more units, plus stricter Chicago rules), Maryland, Massachusetts, Minnesota, New Hampshire, New Jersey, New Mexico, New York (buildings of six or more units), North Dakota, Ohio, Pennsylvania (buildings of 25 or more units, from month 25), and Washington, D.C. Several apply only above a deposit size, a building size, or a minimum tenancy. California and Texas have no statewide requirement. Verify your own state and city before relying on any figure, because rates and thresholds change every year.
How is the interest rate on a security deposit set?
It uses one of three mechanisms. Some states fix a statutory rate — Ohio and Massachusetts both reference five percent, and Minnesota sets one percent simple interest. Some tie the rate to the bank savings rate on the account holding the deposit, so it floats — New Hampshire, New Jersey, and Washington, D.C. work this way. And some publish an annual index a regulator recalculates each year, such as Connecticut’s deposit index, Maryland’s Treasury-linked formula, and Chicago’s annual security-deposit rate. Always confirm the current number for the year in question.
Where does a security deposit have to be held?
Many interest states also require the deposit to sit in a separate, dedicated, interest-bearing account — often at a bank in that state — and prohibit commingling it with your operating or personal funds. Maryland requires a separate account devoted exclusively to deposits at a Maryland institution; Massachusetts requires a separate account protected from the landlord’s creditors; Washington, D.C. requires an interest-bearing escrow account. Meeting the interest rule does not automatically satisfy the account rule — they are two distinct obligations.
When must a landlord pay the interest to the tenant?
Two common schedules. Some states require annual payment — interest paid or credited toward rent each year on the lease anniversary (New Jersey and Chicago work this way for deposits held long enough). Others require it only at move-out, as part of the final deposit accounting (Maryland, North Dakota). Several require both, such as Massachusetts, which pays annually and reconciles again at move-out. Read your statute for the exact timing and how a missed year is handled.
What is the penalty for failing to pay security deposit interest?
The penalty usually dwarfs the interest itself. Deposit statutes commonly award a tenant double or triple the deposit plus attorney fees for violations. Massachusetts is the classic example: failing to comply can expose a landlord to three times the deposit plus interest and attorney fees, even where the landlord would otherwise have been entitled to keep some of the deposit for damages. The interest owed might be a few dollars; the penalty for ignoring the rule can be thousands. Treat the requirement as mandatory.
Do California and Texas require interest on security deposits?
No. Neither California nor Texas has a statewide statute requiring landlords to pay interest on a security deposit. Both still have strict deposit rules — deposit caps, itemization requirements, and firm return deadlines with penalties — so no-interest does not mean no-rules. And a local ordinance can still impose interest even where state law does not, so check your city as well as your state.
Can I deduct bank fees from the deposit interest before paying it?
It varies by state. A few states let the landlord keep a small administrative share — New York and Pennsylvania let a landlord retain one percent per year as an administration fee on the accounts they cover, paying the tenant the balance. Others require the full interest earned to go to the tenant. Do not assume you may net out bank charges; confirm the exact language in your statute before deducting anything.
What should I do if I forgot to pay annual interest for several years?
Do not wait until move-out. Calculate the total interest owed for every missed period using the correct rate for each year, pay it to the tenant with a written explanation, and keep documentation of the calculation and payment. Paying promptly once you discover the gap shows good faith and can reduce your exposure. If the amount is large or the tenant is already in dispute, get advice from a local landlord-tenant attorney before you act.
Does a month-to-month or short-term tenant get deposit interest?
Sometimes not. Several statutes only trigger the obligation once the tenancy reaches a minimum length: New Hampshire and Washington, D.C. key it to about a year, North Dakota to more than nine months, Ohio to six months, and Iowa to more than five years. Below the threshold, no interest is owed even in a state that otherwise requires it. Where interest does accrue, it typically runs from the day you received the deposit, so a threshold decides whether any interest is payable at all — not from what date it counts.
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