You’ve secured a new tenant, signed the lease agreement, and stowed their security deposit away for safekeeping without giving it a second thought. Then, months down the line, you learn your state requires you to pay security deposit interest. You’ve owed it since day one, and the interest is quietly adding up.
We’ve seen many landlords learn this lesson the hard way, facing an unexpected bill and potential legal penalties. Use this guide to understand the legal guidelines in your state and how to comply with them.
Collecting and Paying Interest on Security Deposits
Before we detail specific regulations by state, here’s a quick overview of how deposit interest usually works:
How do you pay the interest?
If required by law, landlords must always pay the accrued interest back to the tenant. The specific protocols vary, but property owners typically send the balance to renters by:
- Crediting it to their monthly rent balance.
- Paying them directly.
- Adding it to their security deposit, they return at move-out.
What is the security deposit interest rate?
When local laws require landlords to pay interest on deposits, they’re usually responsible for paying the actual interest earned on the account balance.
For example, after 5 years of tenancy, Iowa law requires property owners to pay tenants the accrued interest on the deposit if the owner keeps it in an interest-bearing account (Iowa Code § 562A.12).
However, some states set their own specific percentage. Arizona law, for example, requires rental owners to pay 5% interest per year (Ariz. Rev. Stat. § 33-1431B). If they own multiple units, this 5% fee can quickly become expensive. To avoid going out of pocket, invest the money wisely and stay organized so these fees don’t cut into your bottom line.
What about local laws?
Beyond state laws, some cities have their own regulations.
For example, California doesn’t make property owners pay back the interest on deposits, but Los Angeles (Los Angeles, Cal., Mun. Code § 151.06.02) and San Francisco (San Francisco, Cal., Code § 49.2) do. As a best practice, consult a trusted legal professional.
Does your state require landlords to pay security deposit interest?
In 17 states, landlords are required to provide tenants with interest, but the circumstances vary. Here’s a breakdown of each state’s specific legal regulations:
Arizona
Landlords must pay tenants 5% interest annually on deposits (Ariz. Rev. Stat. § 33-1431B).
Connecticut
Property owners must pay any accrued interest upon termination of the tenancy for all rentals except dorms (Conn. Gen. Stat. § 47a-21i).
Florida
If it’s an interest-bearing account, landlords can either pay 75% of the interest or 5% per year.
With a non-interest-bearing account, they don’t owe tenants interest.
In a surety bond, they must pay tenants 5% interest annually (Fla. Stat. § 83.49).
Illinois
Interest payments are only required if a landlord owns 25+ units and they hold the deposit for 6+ months (765 Ill. Comp. Stat. 715/1). The rate changes annually, but it’s 0.005% for 2025.
Iowa
If they store the deposit in an interest-bearing account, landlords must provide interest after 5 years (Iowa Code § 562A.12).
Maine
Landlords of mobile homes must provide the actual interest earned. The amount can’t be less than the Federal Reserve secondary market annual interest rate on a 6-month certificate of deposit (Me. Rev. Stat. tit. 10, § 9098).
Maryland
Landlords must pay interest on security deposits exceeding $50 and held for 6+ months (Md. Code, Real Prop. § 8-203). Use the state’s helpful interest calculator to determine your rate.
Massachusetts
Landlords must pay either 5% interest annually or the account’s accrued amount (whichever is lower) on funds they hold for 1+ years (Mass. Gen. Laws ch. 186, § 15B).
Minnesota
Property managers must pay 1% annually on deposits, unless the total interest earned at the end of the tenancy is less than $1 (Minn. Stat. § 504B.178).
New Hampshire
Property owners must pay tenants any interest earned when the funds are held for 1+ years (N.H. Rev. Stat. § 540-A:6).
New Jersey
Landlords must pay all interest to tenants in cash, credit it toward the rent due at renewal, or pay it on January 31 if they give tenants written notice (N.J. Stat. § 46:8-19).
New Mexico
When security deposits exceed 1 month’s rent, landlords must pay annual interest on the excess amount based on the Federal Home Loan Bank Board’s rate (N.M. Stat. § 47-8-18).
New York
If the property has 6 or more units, the owner must pay all accrued interest to tenants upon termination of a lease. However, they can keep 1% of the interest (N.Y. Gen. Oblig. Law § 7-103).
North Dakota
Landlords must provide tenants with any interest the account accrued when a lease is terminated (N.D. Cent. Code § 47-16-07.1).
Ohio
If the deposit is held for 6+ months and it exceeds 1 month’s rent, landlords must pay tenants 5% annual interest on the excess amount or $50, whichever is greater (Ohio Rev. Code § 5321.16).
Pennsylvania
After 2 years, landlords must provide tenants with the actual interest earned minus a 1% fee (68 Pa. Stat. § 250.511).
Washington, D.C.
Landlords must give tenants interest after 12 months. The amount due is the account’s savings rate on January 1st and July 1st (D.C. Mun. Regs. tit 14, r 311).
States Without Interest Payment Laws
If your state doesn’t set interest payment laws for security deposits, and your local area doesn’t have regulations either, you’re off the hook. You don’t legally have to return the interest to tenants.
However, top landlords offer this perk to entice renters to their properties. When listing their unit, they advertise that the renter will get the actual interest earned on their deposits. Since the property owner isn’t losing anything, it’s a win-win for both parties!
Best Practices for Managing Interest on a Security Deposit
Avoid any mix-ups between funds with these tips to help you stay organized and accountable:
- Store each tenant’s deposit in its own interest-bearing account
- Keep up with rate changes from your state’s banking authority
- Send tenants annual interest statements for good communication and transparency
- Take note of account details, interest rates, and payout dates
Streamline the process even further by using free property management software to automate tracking and reporting, making it quick and easy to handle interest on a tenant’s deposit.
Security Deposit Interest Calculator FAQs
Can you get interest on a security deposit?
Yes, but it depends on the property’s local and state laws.
What is the interest rate on security deposits?
Rates vary by location. It could be set by state law or the account’s interest rate.
Does a security deposit earn interest?
In some states, landlords must pay tenants the interest earned.
How to calculate interest on a rent deposit?
To calculate interest, you’ll first need to determine the local area’s legal guidelines. We recommend speaking with a trusted legal or financial advisor.
