Landlords only have to pay interest on security deposits where a state or local law requires it, and that covers roughly 14 states plus the District of Columbia along with a scattering of cities. There is no federal rule on the subject. Even in jurisdictions that do require interest, common exemptions based on how many units a landlord owns, how long the tenancy has lasted, or how large the deposit is can take an individual lease outside the rule. Where the obligation does apply, the yearly amounts are usually small, but the penalties for ignoring the requirement can be substantial.
Where the Rule Applies
Security deposit interest is governed exclusively at the state and local level. Congress has never passed a law requiring it, and no federal agency regulates the practice. The obligation exists only if a state legislature or a city council has specifically created it.
Approximately 14 states plus the District of Columbia have statutes requiring landlords to pay tenants some amount of interest, though the details differ in nearly every jurisdiction. A handful of other states don’t require interest payments but do require landlords to hold deposits in interest-bearing accounts, which can have a similar practical effect.
Cities and counties sometimes impose their own requirements on top of state law. These local ordinances are often stricter than the state rules and can apply even in states with no statewide interest requirement. If you rent in a major metropolitan area, check both your state law and your local housing code. The local rule is the one more likely to affect you.
When the Rule Doesn’t Apply Even in Those States
Even in jurisdictions that mandate interest, the statute usually carves out exemptions. The most common one is based on the size of the landlord’s holdings. A state might exempt landlords with fewer than six units, or only require interest from landlords who own 25 or more units in a single building or complex. A small landlord renting out a duplex frequently falls outside the rule entirely.
Other conditions can relieve a landlord of the duty:
- Tenancy duration. Some states only require interest after the deposit has been held for a set period. In at least one state, interest earned during the first five years of a tenancy belongs to the landlord rather than the tenant.
- Minimum holding period. A number of statutes don’t activate until the deposit has been held for at least six months.
- Deposit size. Several jurisdictions exempt deposits below a dollar threshold, such as $50.
- Property type. Some rules apply only to traditional apartments and exclude mobile homes, transient hotel-style rentals, or government-subsidized housing.
That means seeing your state on a list of “states that require deposit interest” is not the end of the inquiry. The only way to know for certain is to read the specific statute or ordinance covering your rental’s location.
How Much Interest and When It’s Paid
The rate your landlord owes is set by the applicable law, and the methods vary more than you might expect:
- Fixed statutory rate. Some jurisdictions set a flat rate, such as 1% or 1.5% per year, with simple (non-compounded) interest. The math is straightforward but can leave tenants earning well below market rates.
- Passbook savings rate. Other states tie the rate to what the largest commercial bank in the state pays on basic savings accounts, which in recent years has meant extremely low rates, sometimes as little as 0.01%.
- Treasury yield or blended rate. A few jurisdictions peg the rate to the U.S. Treasury yield curve, or require the greater of a fixed minimum and the Treasury rate.
- Actual earnings. Some laws require the landlord to deposit the money in an interest-bearing account and pay you whatever that account actually earns, minus a small administrative fee in certain cases.
Timing varies too. Many jurisdictions require annual payment, either as cash or as a credit against rent. Others let the landlord accumulate interest and pay it all when the tenancy ends and the deposit is returned. If your landlord is supposed to pay annually and doesn’t, the interest doesn’t disappear. It continues to accrue, and you can demand it later.
Where Your Deposit Must Be Held
Many states that require interest payments also dictate how and where the landlord holds the deposit. The most common requirement is a separate account at a federally insured institution. Some states go further and require an escrow account specifically designated for security deposits, meaning the landlord cannot mix your deposit with personal or business funds.
Commingling prohibitions exist in a significant number of states, and violating them can carry penalties independent of whether interest was properly paid. If your deposit is sitting in the landlord’s personal checking account, there is no mechanism to generate the interest you’re owed, and the money is at greater risk if the landlord faces financial trouble. Several states also require the landlord to notify you in writing of the bank name and account details, sometimes within a set number of days after you move in.
If your landlord can’t tell you where your deposit is being held, treat that as a warning sign. It may mean the funds were never placed in a proper account, which could entitle you to penalties or even the immediate return of the deposit in some jurisdictions.
A Note on Taxes
Interest you receive on a security deposit is taxable income. The IRS treats interest credited to an account you can access, or paid to you directly, as income in the year it becomes available.1IRS. Topic No. 403, Interest Received If your landlord pays you $15 in interest annually or credits that amount toward rent, include it on your return for that year. The amounts are usually small enough that they won’t meaningfully change your tax bill, but they do belong on the return.
What to Do if Your Landlord Doesn’t Pay
Start with a written demand. Send a letter by certified mail with return receipt that identifies the applicable law, calculates the interest you believe you’re owed, and requests payment within a specific timeframe. Keep a copy of everything. Many states require you to give the landlord a chance to comply before you can sue, and the letter also demonstrates good faith if the case goes to court.
If the landlord ignores your letter or disputes the amount, small claims court is your next option. These courts are built for exactly this kind of dispute. Filing fees generally range from $15 to over $200 depending on your jurisdiction and the amount claimed, and you typically don’t need a lawyer. You’ll want your landlord’s legal name and address, a copy of your lease, proof of the deposit payment, and documentation showing the landlord failed to pay interest.
Penalties That Go Beyond the Interest Itself
This is where landlords who ignore the rules get caught. Many jurisdictions don’t just award the unpaid interest. They impose statutory penalties that dwarf the interest amount. Depending on the law that applies, a court might award double the amount wrongfully withheld, and some statutes allow recovery of reasonable attorney’s fees on top of that. A few jurisdictions go further with treble damages or penalties calculated on the full deposit amount rather than just the unpaid interest.
A landlord who skips a few dollars in annual interest payments can end up owing hundreds or thousands once penalties and court costs are factored in. That leverage is worth understanding before you send the demand letter, because many landlords will settle quickly once they realize the exposure.
Collecting a Judgment
Winning in court and collecting the money are two separate things. If the landlord doesn’t voluntarily pay after a judgment, you may need to enforce it. Common tools include a writ of execution, which directs the local sheriff to collect from the landlord’s bank accounts or wages, or a lien on real property the landlord owns. A property lien won’t put cash in your hand immediately, but it means the landlord can’t sell or refinance without paying you first. Your court clerk can walk you through the specific procedure.
Keeping Good Records
Whether you’re asking nicely or filing suit, your case depends on documentation. Hold on to your original lease, proof of your deposit payment, any correspondence with the landlord about the deposit, move-in and move-out inspection reports, and photographs of the unit’s condition. If your landlord provided written notice of where the deposit was being held or what interest rate applies, keep that too. Records are the difference between a strong claim and a dispute a judge has no way to resolve in your favor.