Navigating the Maze: Understanding US Security Deposit Interest Laws

For property management, legal and compliance professionals, understanding and complying with the diverse security deposits interest laws across US jurisdictions is a critical aspect of their role. The complexity of these regulations, combined with the recent trend of rising interest rates and increased lobbying for tenant rights, makes this an area requiring careful attention – especially for those with assets across multiple states. Solutions like Roost can be instrumental in navigating these challenges, offering tools to manage interest accrual and ensure compliance across multiple states with varying requirements. 

The basics of security deposit interest

Security deposits, held as a financial safeguard by landlords are subject to interest accrual in many states. This interest is meant to compensate tenants for the potential earnings they forego while their money is held.

The handling of these deposits, including the accrual of interest and its payout, varies significantly across states. 

Bank holding and interest accrual

Managing security deposit interest law is a crucial aspect of property management, and understanding the rules and regulations can be complex. Different states have varying requirements when it comes to interest rates, which can either be simple or compounded.

Furthermore, some states give discretion to the landlord, others specify a specific rate or an interest rate linked to financial indices.  For the latter, the property manager accountant must regularly monitor the indices to adjust interest rates.

For example, in the event of a lease renewal, some states mandate recalculating the interest, especially if the prevailing rates have changed or if the lease terms are modified. This recalculation ensures that tenants are receiving the correct amount of interest based on the current legal requirements and the duration of their tenancy.  

New Jersey security deposit interest law example

New Jersey security deposit interest law mandates that interest accrued on security deposits must either be paid to the tenant annually or compounded annually and credited to the security deposit amount.

This means that the interest earned each year is added to the principal amount of the security deposit, and in the following year, interest is calculated on the new total.

This compounding effect can substantially increase the amount of interest accumulated over time, especially for long-term tenancies. It’s a system designed to ensure that tenants receive a fair return on their deposit, reflecting its potential value if it had been invested elsewhere.

For property managers and landlords in New Jersey, this requires meticulous tracking and accurate calculation of compounded interest to ensure compliance with state regulations.

Properly managing these aspects is essential not only for compliance with state-specific regulations but also for maintaining transparency and trust with tenants.

This is where solutions like Roost can be particularly valuable, offering automated tools to efficiently handle these complex requirements.

Timing of calculations and payouts

Understanding how and when interest on security deposits is calculated and paid out is essential for accounting teams, as these rules can vary from one state to another.  

Some states require annual calculations and payouts, while others allow for these to be done at the end of the tenancy. 

Berkeley, California security deposit interest law example

In jurisdictions like Berkeley, California, interest is paid out annually, so a tenant who has been renting for a year could expect to receive the interest accrued over that period as a separate payment or as a credit against their rent. 

Refunding as a “rent rebate” is more often the method of choice and can be particularly advantageous for both parties

• Tenants benefit from a reduced rent expense.
• Landlords benefit from a simplified process of returning the interest.

If the tenant moves out prior to the end of the year, then interest is paid with the end of their tenancy or added to their security deposit refund.

Overall, the diverse approaches to the timing of interest calculations and payouts necessitate that property managers and landlords are well-versed in their state’s specific security deposit interest laws to ensure compliance and to maintain transparent, fair dealings with their tenants.

State-by-state variations of security deposit interest law

Each state has its unique approach to managing security deposit interest law. For example, New York mandates a prevailing rate for buildings with six or more units, whereas California has local ordinances in cities like San Francisco.

This table illustrating how ten different US states handle security deposit interest requirements:

State/City	Interest Required	Interest Rate	Payout Frequency
New York	Yes	Prevailing rate less 1% administrative fee allowed	Resident choice – annually, rent rebate or end of tenancy
California	Varies locally	Set by local rent boards	Annually or End of Tenancy
Chicago, Illinois	Yes, if held for more than 6 months	0.01% Set annually by city comptroller	Annually
Florida	No (Voluntary)	75% of the annual interest rate paid by the holding account (could be non-interest bearing)	End of Tenancy
Massachusetts	Yes	The annual interest rate paid by the interest bearing account or 5%	Anniversary of lease as rent rebate or cash or mid-year with refund
Maryland	Yes	1.5% per annum or the U.S. Treasury yield, whichever is higher	Annually or End of Tenancy
Minnesota	Yes (If over $50 and held for more than 6 months)	Simple interest at 1% per annum	End of Tenancy
Boulder, CO	Yes	Simple interest at 2.33%  per annum	End of Tenancy
Cincinatti, OH	Yes (If over $50 and held for more than 6 months)	Simple interest at 5%  per annum on amount that exceeds $50 or one months rent	End of Tenancy
New Jersey	Yes	100% of interest in interest bearing account  or money market fund OR 7%	Anniversary of lease as rent rebate or cash or mid-year with refund

Security deposit interest law management challenges

Updating interest rates for long-term tenants

One significant challenge is managing long-term tenants, particularly when it comes to updating interest rates at each renewal.

This requires constant vigilance to ensure that the interest rate applied is the current rate as required by law.

Representing accrued interest on account statements

Another challenge is accurately representing the interest accrued on the itemized security deposit account statements. The final deposit account statement is a regulated requirement in most jurisdictions and thus must reflect the actual interest accrual.

The complexity arises in tracking these interest amounts over time, especially with multiple tenants and different lease start dates as well as the rate changes over time.  

Rising interest rates

In recent years, rising interest rates have made the management of security deposit interest more significant – and thus more meaningful to residents.

This increased significance means that both landlords and tenants are more likely to scrutinize the interest amounts, which can lead to more questions and potential disputes.  Most residents are a “Google or ChatGPT” search away from calculating the interest they are owed. 

Acquisition of a new property and accounting for the interest accrual

When acquiring a new property, landlords must take into account any existing security deposits and the accrued interest on them. This can be particularly challenging if previous records are incomplete or if there’s a lack of clarity about the interest rates that were applied by the former property owner.

It requires careful auditing and potentially recalculating the accrued interest to ensure that the new landlord is compliant with legal requirements and fair to the tenants. Many audits fail to account for this properly, leaving the new owner with the liability. 

Increased lobbying for tenant interest rights

There’s also a trend of more states lobbying for laws that benefit tenants by ensuring they receive interest on their security deposits.

This shift towards tenant rights means property managers must be even more diligent in their compliance efforts.

Oregon

In recent years, Oregon has seen significant tenant advocacy efforts. These efforts have led to changes in laws governing security deposits, including requirements for landlords to pay interest on these deposits under certain conditions.

This reflects a broader trend in the state towards enhancing tenant protections and rights.

Connecticut

Connecticut is another state where tenant rights activists have influenced the legislation regarding security deposits.

The state requires landlords to pay interest on security deposits at a rate that’s either equal to the average interest rate paid on savings accounts by insured banks in the state or at a rate of 1.5% per annum, whichever is higher.  

Washington D.C.

The District of Columbia has strong tenant rights laws, heavily influenced by active lobbying and advocacy groups.

In D.C., landlords are required to place security deposits in interest-bearing accounts and return them with accrued interest at the termination of the lease.

The rate of interest is set and adjusted annually based on the average rate paid on U.S. Treasury Bills.

The importance of compliance and penalties for non-compliance

The importance of complying with state laws regarding security deposit interest is not just a best practice but a legal requirement, underscored by various penalties and legal actions for non-compliance, as well as recent class action lawsuits. 

Penalties can range from substantial fines of 2-3x the security deposit plus legal fees to costly class action settlements, emphasizing the need for property management companies to invest in compliance resources and tools to avoid these risks​.

Georgia security deposit class action lawsuit

One recent example is the class action lawsuit in Georgia that resulted in a $2.4 million settlement. A major apartment management company was accused of routinely withholding security deposits from tenants.

Similarly, in California, there have been multiple class actions alleging improper handling of security deposits by property management companies. 

Security deposit interest laws

The varying requirements for security deposit interest across the United States present a complex landscape for property managers. With the increasing focus on tenant rights and the rising interest rates, staying informed and compliant is more important than ever.

Utilizing resources like Roost can greatly assist in navigating these complexities, ensuring compliance, and maintaining transparent and fair relationships with tenants.

Its platform can automate the calculation of interest, update rates for long-term tenants, and ensure accurate representation of accrued interest on account statements. By staying vigilant and employing the right tools, property management professionals can adeptly handle the intricacies of security deposit interest across different jurisdictions.