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 give an itemized list of any deductions.
But many self-managing landlords are surprised by one more rule. This is especially true for those who work across state lines or who recently bought a property in a new jurisdiction. 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 rule 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. Those can include statutory damages that exceed the deposit amount.
This article explains why some jurisdictions require deposit interest and how the calculation typically works. It shows how to compute what you owe using a standard simple interest formula. It also covers how and when that interest generally needs to be paid.
Finally, it 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 just because it sits in the landlord's account.
A number of state legislatures, and a smaller number of city councils, have reached a view on this. If a landlord holds a renter's money for months or years, the renter is entitled to a share of what that money would have earned in a bank.
Roughly a dozen to fifteen states have some form of deposit interest rule on the books at any given time. A handful of major cities, most notably New York City, impose their own interest rules. These may be 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. 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 methods change. The only reliable approach is to check two sources before you assume either way whether interest applies to you. Check your specific state's landlord-tenant statute and, separately, your city's municipal code.
How deposit interest requirements typically work
Even among jurisdictions that require it, the mechanics vary a great deal. Four patterns show up again and again.
A state-set or state-capped rate
Some states set a specific interest rate in statute. Others 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. Other times it adjusts each year based on market conditions.
Because the rate is published rather than negotiated, landlords in these states need to check the current published figure each year. Do not 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. The landlord then passes through the actual interest earned, sometimes with a small administrative deduction allowed. Under this model, the calculation depends on what the bank statement shows for that account, not a fixed statutory percentage.
Minimum deposit amounts or holding periods
Many interest rules only apply above a certain threshold. A state might require interest only when the deposit exceeds a set dollar amount. Or it might require interest 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 duty at all. That can hold true even in a state that otherwise requires it.
Administrative fee floors
Some jurisdictions let the landlord keep the interest as an administrative or handling fee if the calculated amount falls below a small statutory floor. The idea is 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.
These four patterns can combine. For example, a state rate may only apply above a deposit threshold, or a passbook rate may come with an administrative floor. So you cannot assume your state uses a single clean method. Read the actual statute text, not a summary, before you finalize your process.
How to calculate the interest owed
Some states or cities require deposit interest and do not specify a different formula. There, 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. The unit is 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. It is separate from, and in addition to, returning the deposit principal itself. This assumes no deductions for damage or unpaid rent apply.
Some jurisdictions require interest to be paid or credited annually rather than only at lease end. In that case, the same formula is applied to each 12-month period, using the deposit amount held during that period.
Two details often trip landlords up. First, the deposit amount may have changed during the tenancy. For example, a portion may have been returned, or an extra deposit may have been collected. Then the calculation needs to be broken into segments. Each segment uses the correct principal and correct number of months.
Second, the interest rate itself may have changed during the holding period, because the jurisdiction publishes a new rate each year. Then each segment during which a given rate was in effect needs to be calculated separately. Those amounts are then added together.
When and how interest must be paid
Jurisdictions differ on timing as much as they differ on how the rate is set. Three payment patterns are common.
Some statutes require interest to be paid to the renter annually, typically on the anniversary of the tenancy. This applies 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. In that case it goes out alongside the itemized statement of any deductions.
A third approach allows or requires the landlord to credit the interest against the renter's rent. That reduces an upcoming rent payment by the interest amount, rather than issuing a separate check.
Some jurisdictions also require the landlord to disclose certain facts in writing at lease signing. These are where the deposit is held and what interest rate or bank account applies, so the renter can check the calculation on their own.
Where that disclosure rule exists, it is typically treated as a separate compliance duty from paying the interest itself. So a landlord who eventually pays the correct interest amount but never gave the required disclosure can still be found in violation.
Municipal rules can layer on top of state law
New York City is the most often cited example of a city with its own deposit interest rule. It applies to buildings above a certain unit threshold, independent of whatever New York State law says more broadly. Other cities have passed their own ordinances on deposit handling, interest, or disclosure that go beyond their state's baseline rule.
A landlord 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 added or different city-level duties layered on top. Checking state law alone is not enough in these cases.
Verify before you rely on any summary, including this one
The concept and mechanism described here are consistent across most jurisdictions that require deposit interest. That means a rate source, a threshold, a calculation formula, and a payment timing rule. The specific state, rate, threshold, and payment schedule are not consistent, and they change.
Before you set a policy for 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 an accurate, clear 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.
That doubt 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 or still due. For a collected deposit, the amount and original collection date are captured at the time. That gives you 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. That supports the account-separation rule that most deposit statutes impose, whether or not interest applies.
Digital record-keeping means the amount, date, and account are stored centrally rather than in a separate spreadsheet. 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. That way you always have the accurate deposit amount and date your interest calculation depends on.
