Iowa Security Deposit Interest

Iowa security deposit interest: the landlord keeps it for 5 years

Iowa is one of the few states where the landlord, not the tenant, owns the interest earned on a security deposit, at least for the first five years of tenancy. Under Iowa Code § 562A.12(2), any interest earned during the first 5 years of a tenancy belongs to the landlord. Only after the tenancy passes the 5-year mark does the tenant become entitled to the actual interest the account earns going forward. There is no statutory percentage rate, no $50 threshold, and no banking formula. The statute simply assigns ownership of the interest based on the length of tenancy.

How Iowa's 5-year rule actually works

The deposit must be held in a federally insured bank, savings and loan, or credit union under § 562A.12(2), and cannot be commingled with the landlord's personal funds. A common trust account holding multiple tenants' deposits is permitted. The account may be interest-bearing (the law does not require it to be), but if it is, the landlord owns all interest earned during years one through five. Starting in year six, the tenant is entitled to the actual interest the account earns. There is no requirement to retroactively credit the first five years.

Why Iowa landlords often do not pay any interest in practice

Most Iowa residential tenancies turn over in one to three years, far short of the 5-year threshold. As a practical matter, Iowa is a "no interest required" state for the typical residential lease. Landlords who hold deposits in non-interest-bearing accounts owe nothing regardless of tenancy length, and even those using interest-bearing accounts keep everything earned during the first 5 years. This is materially different from Minnesota (1% required from day one) or Maryland (1.5% floor or 1-year Treasury yield, whichever is greater).

What happens after 5 years in Iowa

Once the tenancy crosses the 60-month mark, any interest the account earns from that point forward belongs to the tenant. If the deposit is in a common trust account, interest is prorated per tenant. There is no statutory rate floor, so in a low-rate environment the tenant may receive very little. Best practice for long-term tenancies is to start tracking interest at the 5-year anniversary and pay it at lease termination as part of the deposit reconciliation.

How to use this calculator

Enter the deposit amount and how long the deposit has been held. The calculator shows whether Iowa's 5-year rule has been crossed and what (if anything) is owed to the tenant under Iowa Code § 562A.12(2).

Frequently asked questions about Iowa deposit interest

Does Iowa require landlords to pay interest on security deposits?

Only after 5 years of tenancy. For the first 5 years, Iowa Code § 562A.12(2) gives all interest earned to the landlord. Starting in year six, the tenant is entitled to the actual interest the account earns. There is no statutory percentage rate.

What is the Iowa security deposit interest rate?

No statutory rate exists. The tenant (after 5 years) gets the actual interest the account earns, which depends entirely on the bank's rate and whether the landlord chose an interest-bearing account.

Can an Iowa landlord put the deposit in a non-interest-bearing account?

Yes. Iowa Code § 562A.12(2) requires only that the account be at a federally insured institution and that funds not be commingled. The statute permits but does not require interest-bearing accounts. A non-interest account means no interest is owed at any point.

What is the maximum security deposit in Iowa?

Two months' rent under Iowa Code § 562A.12(1). The cap applies regardless of how the deposit is held or whether interest accrues.

What happens if an Iowa landlord wrongfully keeps the deposit?

Bad-faith retention triggers punitive damages plus the tenant's actual damages, court costs, and reasonable attorney fees under § 562A.12(7), in addition to return of the wrongfully withheld portion.