Do You Owe Interest on a Tenant's Security Deposit?

TL;DR: About 15 states plus Washington DC require landlords to pay interest on security deposits, with rates typically set annually and ranging from around 0.1% to 5%. Most other states have no interest requirement at all. Check your state's specific statute before assuming either way, because getting this wrong can cost you the entire deposit in some jurisdictions.

_Last reviewed: July 2026 · 6 min read_

You collected a security deposit two years ago, and now the tenant is moving out asking about interest. You're not sure if you owe anything, or how you'd even calculate it if you do. The answer depends entirely on your state, and a handful of cities layer on their own rules.

Okoniq Property Hub logs deposit amounts, dates collected, and applicable interest rates per property, so you're not digging through old leases when a tenant moves out.

Which states actually require interest on security deposits?

Roughly 15 states plus Washington DC require it, and the list includes Connecticut, Illinois (Chicago specifically), Iowa, Maryland, Massachusetts, Minnesota, New Jersey, New York (for buildings with six or more units), Pennsylvania, and Vermont, among others. Rates vary widely. Connecticut sets its rate annually and it's been around 0.5% to 1% in recent years. New York City requires banks to pay interest on deposits held in interest-bearing accounts, though the rate has hovered near 1%.

Most states have no interest requirement at all, including Texas, Florida, Ohio, and Georgia. If your rental sits in one of those states, you can hold the deposit in a regular account and owe nothing beyond the principal at move-out. This is separate from the question of whether you owe the deposit back at all, which is covered more broadly in security deposit rules every landlord should know.

Some cities carve out their own rules independent of the state. Chicago requires interest even though Illinois as a whole does not, and the rate is published annually by the city comptroller. If you own in a state with no statewide law, check your specific city or county before assuming you're in the clear.

How is the interest rate set, and who decides it?

The rate is usually set by state statute, a state banking commissioner, or in some cases the average passbook savings rate at local banks. In Massachusetts, the requirement is 5% annually or the actual interest earned on the account, whichever is lower, and it's paid out either annually or at lease termination depending on local practice.

New Jersey ties its rate to whatever a regulated banking institution offers on a standard savings account, which means it fluctuates year to year and isn't a fixed percentage you can memorize. Maryland set its rate at 1.5% as of recent years, down from higher historical rates when interest rates generally were higher.

The safest approach is checking your state's department of housing or attorney general site each year rather than relying on a number you learned once. Rates change, and using an outdated figure either shortchanges the tenant or overpays unnecessarily.

What happens if you forget to pay it?

Consequences range from minor to severe depending on the state. In some jurisdictions, failing to pay required interest simply means you owe the back interest plus the deposit when the tenant moves out, no different than any other financial obligation.

In stricter states, the penalty is much higher. Some statutes allow the tenant to sue for double or even treble damages on the entire deposit, not just the unpaid interest, if the landlord ignores the interest requirement. New York and New Jersey both have provisions like this baked into their tenant protection statutes.

This is one more reason to treat deposit handling with the same rigor as any other legal deadline. If you're already tracking how often to inspect your rental and other compliance dates, add the interest calculation to that same calendar rather than treating it as an afterthought.

How do you actually calculate and pay it out?

You calculate simple interest on the deposit amount for the period it was held, using whatever rate and compounding method your state specifies. Most states use simple annual interest rather than compounding, so a $1,500 deposit held for two years at a 1% rate owes roughly $30 in total interest, not $30 compounded.

| Method | When Used | Example | |---|---|---| | Annual payout | Some states require yearly interest checks or credits | Massachusetts, parts of NJ | | Lump sum at move-out | Most common approach | CT, MD, most others | | Credited toward rent | Sometimes allowed as alternative to a check | Varies by state |

Most landlords find it simplest to calculate the full amount owed at move-out and either add it to the deposit refund check or apply it as a credit if the tenant is moving into another unit you own. Keep the math documented in the same records you use for the move-out inspection walkthrough, so the final accounting is transparent if the tenant questions it.

Does the deposit need to sit in a separate interest-bearing account?

In many of the states that require interest payments, yes, the deposit must sit in a separate, often interest-bearing, account rather than mixed with your operating funds. New York requires deposits for buildings with six or more units to go into an interest-bearing account at a bank, and the landlord must notify the tenant in writing where it's held.

Commingling deposit funds with your own operating cash is a separate violation in many states, on top of any interest owed. Some states require you to disclose the bank name and account number to the tenant at move-in, which ties directly into good practice covered in the landlord move-in checklist for new tenants. Setting this up correctly from day one avoids a scramble at move-out when the tenant is asking pointed questions about where their money has been.

FAQ

Do I owe interest if my state doesn't require it?

No. If your state has no statutory requirement, you owe only the deposit principal at move-out, minus any legitimate deductions for damage or unpaid rent.

Can a lease clause override the state's interest requirement?

No. Lease terms that waive a legally required interest payment are generally unenforceable, and courts in most interest-mandate states will still hold the landlord liable even if the tenant signed a lease saying otherwise.

Is deposit interest taxable income for the tenant?

Yes, in most cases the interest paid out is technically taxable income to the tenant, though in practice the amounts are usually small enough that neither party reports it. Consult a CPA if you're dealing with larger deposits or commercial tenancies.

What if the tenant never asks for the interest?

You still owe it under the statute regardless of whether the tenant requests it, and failing to volunteer it doesn't protect you if the tenant later discovers the omission and files a complaint.

Does the interest requirement apply to pet deposits or last month's rent?

It depends on your state's definition of "security deposit." Some states include pet deposits and last month's rent in the interest calculation, while others limit it strictly to the security deposit portion, so check your statute's definitions section directly.

This is educational information, not legal or tax advice. Consult your state's landlord-tenant statute or a local attorney before setting deposit interest policy, since rates and requirements change and penalties for noncompliance can be significant.