Note: This article is for general education only and is not legal advice. Security deposit interest rules vary by state and, in some cases, by city. Requirements change over time, so confirm current statutory language with your state or local housing authority, or consult a landlord-tenant attorney, before relying on anything here.
Most landlords know the basics of holding a security deposit: keep it separate, return it within a set number of days, and provide an itemized list of any deductions. What surprises many self-managing landlords, particularly those who operate across state lines or who recently acquired a property in a new jurisdiction, is that a meaningful subset of states and cities also require landlords to pay the renter interest on that deposit for as long as it is held. Missing this requirement is not a minor paperwork slip. In several jurisdictions, failing to pay required deposit interest can expose a landlord to the same penalties as mishandling the deposit itself, including statutory damages that exceed the deposit amount.
This article explains why some jurisdictions require deposit interest, how the calculation typically works, how to compute what you owe using a standard simple interest formula, and how and when that interest generally needs to be paid. It also explains why you should treat any state-by-state list, including informal ones you find online, as a starting point for research rather than a final answer.
Why some jurisdictions require interest on security deposits
A security deposit is the renter's money. The landlord holds it as security against damage or unpaid rent, but the deposit does not become the landlord's property simply because it sits in the landlord's account. A number of state legislatures, and a smaller number of city councils, have concluded that if a landlord holds a renter's money for months or years, the renter is entitled to a share of whatever that money would have earned in a bank.
Roughly a dozen to fifteen states have some form of deposit interest requirement on the books at any given time, and a handful of major cities, most notably New York City, impose their own interest rules independent of, or layered on top of, state law. States such as Massachusetts, Connecticut, New Jersey, Illinois (through Chicago's municipal ordinance), Maryland, and Pennsylvania have at various points required landlords to pay interest on deposits, and New York City has long required interest on deposits for buildings above a certain unit count. This list should not be treated as current or complete. Legislatures amend these statutes, cities pass and repeal ordinances, and rate-setting mechanisms change. The only reliable approach is to check your specific state's landlord-tenant statute and, separately, your city's municipal code, before you assume either way whether interest applies to you.
How deposit interest requirements typically work
Even among jurisdictions that require it, the mechanics vary considerably. Four patterns show up repeatedly.
A state-set or state-capped rate
Some states set a specific interest rate in statute, or direct a state agency (often the state treasurer, banking commissioner, or department of housing) to publish an annual rate that landlords must apply. This rate is sometimes fixed for years at a time and sometimes adjusts annually based on prevailing market conditions. Because the rate is published rather than negotiated, landlords in these states need to check the current published figure each year rather than assume last year's rate still applies.
A bank passbook or actual-earnings pass-through
A different approach ties the interest owed to what the money actually earned. Some statutes require the landlord to hold the deposit in an interest-bearing account and pass through the actual interest earned, sometimes with a small administrative deduction allowed. This model shifts the calculation burden onto whatever the bank statement shows for that account, rather than a fixed statutory percentage.
Minimum deposit amounts or holding periods
Many interest requirements only apply above a certain threshold. A state might require interest only when the deposit exceeds a set dollar amount, or only once the tenancy has lasted beyond a minimum period, often somewhere between six months and one year. A deposit collected for a short-term lease that ends before the threshold is reached may not trigger any interest obligation at all, even in a state that otherwise requires it.
Administrative fee floors
Some jurisdictions allow the landlord to retain interest as an administrative or handling fee if the calculated amount falls below a small statutory floor, on the theory that mailing a check for a few cents of interest is not a meaningful benefit to the renter. Above that floor, the full interest amount typically must be paid or credited.
Because these four patterns can combine (a state rate that only applies above a deposit threshold, for example, or a passbook rate with an administrative floor), you cannot assume your state uses a single clean mechanism. Read the actual statute text, not a summary, before finalizing your process.
How to calculate the interest owed
Where a state or city requires deposit interest and does not otherwise specify a different formula, the calculation is generally simple interest, prorated for the number of months the deposit was actually held:
Interest Owed = Deposit Amount x Annual Rate x (Months Held / 12)
Consider a worked example. A landlord collects a 1,500 dollar security deposit on a unit governed by a hypothetical jurisdiction requiring 2 percent annual interest on deposits. The renter stays for 18 months before moving out.
Interest Owed = 1,500 x 0.02 x (18 / 12)
Interest Owed = 1,500 x 0.02 x 1.5
Interest Owed = 45 dollars
That 45 dollars is what the landlord owes the renter in interest, separate from and in addition to returning the deposit principal itself, assuming no deductions for damage or unpaid rent are applicable. If the jurisdiction requires interest to be paid or credited annually rather than only at lease end, the same formula is applied to each 12-month period, using the deposit amount held during that period.
Two details commonly trip landlords up. First, if the deposit amount changed during the tenancy, for example if a portion was returned or an additional deposit was collected, the calculation needs to be broken into segments that each use the correct principal and correct number of months. Second, if the interest rate itself changed during the holding period, because the jurisdiction publishes a new rate annually, each segment during which a given rate was in effect needs to be calculated separately and then summed.
When and how interest must be paid
Jurisdictions differ on timing as much as they differ on rate mechanism. Three payment patterns are common.
Some statutes require interest to be paid to the renter annually, typically on the anniversary of the tenancy, regardless of whether the lease is renewing or ending. Others require interest to be calculated and paid only when the deposit itself is returned, at the end of the tenancy, alongside the itemized statement of any deductions. A third approach allows or requires the landlord to credit the interest against the renter's rent, effectively reducing an upcoming rent payment by the interest amount rather than issuing a separate check.
Some jurisdictions also require the landlord to disclose, in writing at lease signing, where the deposit is held and what interest rate or bank account applies, so the renter can verify the calculation independently. Where that disclosure requirement exists, it is typically treated as a separate compliance obligation from the payment of the interest itself, meaning a landlord who eventually pays the correct interest amount but never provided the required disclosure can still be found in violation.
Municipal rules can layer on top of state law
New York City is the most frequently cited example of a city that imposes its own deposit interest requirement, applicable to buildings above a certain unit threshold, independent of whatever New York State law says more broadly. Other cities have passed their own ordinances addressing deposit handling, interest, or disclosure that go beyond their state's baseline requirement. A landlord operating in a state with no deposit interest law can still owe interest under a city ordinance, and a landlord in a state that does require interest can face additional or different city-level obligations layered on top. Checking state law alone is not sufficient in these cases.
Verify before you rely on any summary, including this one
The concept and mechanism described here, a rate source, a threshold, a calculation formula, and a payment timing rule, are consistent across most jurisdictions that require deposit interest. The specific state, the specific rate, the specific threshold, and the specific payment schedule are not consistent, and they change. Before setting a policy for how you handle deposit interest across your portfolio, confirm the current text of your state's landlord-tenant statute, check whether your city has a separate ordinance, and consider consulting a landlord-tenant attorney if you operate across multiple jurisdictions with different rules.
What to Do Next
Getting deposit interest right depends on having an accurate, unambiguous record of two facts for every unit: exactly how much deposit was collected, and exactly when it was collected. Landlords who track deposits in spreadsheets, paper files, or scattered bank records often cannot answer either question with confidence when a renter moves out eighteen months later, and that uncertainty is where interest calculations go wrong, disputes start, and statutory penalties become possible.
Shuk addresses the record-keeping side of that problem directly. It lets you log each security deposit as either already collected, with the amount and original collection date captured at the time, or still due, so there is a single accurate source of truth for exactly what was received and when. An optional deposit-to bank account field lets you route deposits into a designated account for trust accounting purposes, which supports the account-separation requirement that most deposit statutes impose regardless of whether interest applies. Digital record-keeping means that amount, date, and account are stored centrally rather than living in a separate spreadsheet, and centralized lease records mean the deposit terms sit alongside the lease itself rather than in a disconnected file. That gives you the accurate deposit amount and collection date that any interest calculation depends on. For the broader deposit compliance picture, including collection limits and return deadlines, see Security Deposit Laws by State: A Landlord's Compliance Guide.
At as low as $2 per unit per month, with no setup fees and no contract, and with White Glove Onboarding included at no additional cost, Shuk makes accurate, centralized security deposit record-keeping feasible for landlords and property managers running 1 to 100 units.
Book a demo at shukrentals.com/book-a-demo to see how deposit tracking, trust-account routing, and centralized lease records work together so you always have the accurate deposit amount and date your interest calculation depends on.
