Your Security Deposit May Be Earning Interest
— and your landlord is legally required to pay it to you
Here's which states have that rule, and what to do if yours doesn't pay up.

New York City landlords who hold deposits on apartments subject to rent stabilization are required by law to deposit those funds in interest-bearing accounts and pay the accrued interest annually or at the end of the tenancy. A tenant in a stabilized Manhattan studio who paid a $3,000 deposit in 2015 and moved out in 2023 was legally owed eight years of interest — something most tenants never think to ask for, and many landlords quietly pocket.

That example illustrates the core issue: security deposit interest rules are hyperlocal, highly specific, and almost entirely invisible until a tenant or landlord needs to know them. This article covers which states mandate interest payments, the actual rates or formulas those states use, what happens when a landlord ignores the requirement, and the handful of situations where you might be exempt even in a state that has the rule.

The States That Actually Require Interest Payments

Most states do not require landlords to pay interest on security deposits. The ones that do tend to be in the Northeast and upper Midwest, where tenant-protection law has historically been stronger. Here is a state-by-state breakdown of the jurisdictions with a meaningful interest requirement as of the most recent legislative sessions:

• Connecticut: Landlords must hold deposits in escrow accounts at Connecticut banks and pay interest at a rate set annually by the Connecticut Banking Commissioner. For most recent years, that rate has floated between 0.06% and 0.15%. Tenants receive interest annually upon request or at move-out.
• Illinois: Only landlords who own 25 or more units in a single building or complex are covered by the state's Landlord Tenant Act interest requirement. The rate is set by the City Comptroller in Chicago under the Residential Landlord and Tenant Ordinance (RLTO), which historically tracked the local passbook savings rate — around 0.01% in recent low-rate years. Outside Chicago, state law coverage is limited.
• Iowa: Interest is required at the rate earned on the account, and landlords must hold deposits in federally insured interest-bearing accounts. Iowa Code § 562A.12 governs this.
• Maryland: Landlords must put deposits in federally insured interest-bearing accounts. The rate must be at least 1.5% simple interest per year. On a $2,000 deposit, that's $30 per year — modest but legally enforceable.
• Massachusetts: Landlords who hold deposits must keep them in separate, interest-bearing accounts at Massachusetts banks. The interest rate is the passbook savings rate, and it must be paid annually or credited against rent. The requirement also applies to last month's rent deposits, which is unusual compared to other states.
• New Hampshire: Interest is required at the rate of the account, held in an escrow account. Unlike some states, New Hampshire does not set a floor rate.
• New Jersey: Landlords who own more than 10 units must invest deposits in money market funds or government securities, or in federally insured interest-bearing accounts. The tenant receives 85% of the earnings; the landlord may keep 15% as an administrative fee.
• New York: Rent-stabilized and rent-controlled units in New York City are subject to interest-payment requirements. For non-regulated units, New York General Obligations Law § 7-103 requires deposits to be held in New York bank accounts, and interest belongs to the tenant, but the law only mandates interest payments for buildings with six or more units.
• North Dakota: Interest is required at the rate earned, and the deposit must be in a federally insured account under N.D. Cent. Code § 47-16-07.1.
• Pennsylvania: For tenancies of two or more years, landlords must put the deposit in a federally insured interest-bearing account, and tenants are entitled to annual interest payments minus a 1% administrative fee. Shorter tenancies are not covered.
• Virginia: Landlords must hold deposits in federally insured escrow accounts. Under the Virginia Residential Landlord and Tenant Act, interest must be paid at a rate established by the Virginia Real Estate Board, payable at termination.
• Wisconsin: Interest is required only if the deposit earns interest, and landlords may hold deposits in non-interest-bearing accounts. This makes Wisconsin's rule largely theoretical in practice.

Beyond these states, several cities have stronger local ordinances than their state law would suggest. Chicago's RLTO applies a specific annual interest rate (set by the City Comptroller, published each year) and covers all landlords with six or more units. San Francisco requires interest on deposits under its Rent Ordinance for covered units. Los Angeles has its own Rent Stabilization Ordinance requirements. Always check municipal law in addition to state law.

How the Interest Rate Is Actually Calculated

The phrase "interest-bearing account" hides a lot of variation. Three different calculation methods are common across the states that require interest:

1. Fixed or Administratively Set Rate

Connecticut and Maryland set a specific annual rate, either fixed in statute or adjusted yearly by a state agency. Maryland's 1.5% minimum is unusual in being a statutory floor — the landlord must pay at least that even if the account earns less. Connecticut's rate changes annually and has been as low as 0.06% in recent years. If you held a $1,500 deposit in Connecticut for two years at 0.06%, you're owed about $1.80. Not life-changing, but still legally owed.

2. Actual Account Rate

Iowa and New Hampshire require landlords to pass through whatever the account actually earns. This means tenants in a rising-rate environment capture more, but in a near-zero-rate environment like 2010–2021, the practical payment approaches zero. These states impose the obligation without guaranteeing any meaningful return.

3. Percentage of Earnings with an Administrative Fee

New Jersey's approach is the most commercially sophisticated: the landlord invests in approved instruments, earns a market return, keeps 15% as a management fee, and remits 85% to the tenant. On a $3,000 deposit in a money market fund earning 4%, that's roughly $102 to the tenant and $18 to the landlord per year. The landlord has a small financial incentive to place the funds in higher-yielding instruments.

Massachusetts uses the passbook savings rate, which is defined as the rate paid by federally insured savings banks on passbook savings accounts. In practice, this rate has been negligible for most of the post-2008 era, but it surged in 2023 as savings rates rose. A landlord holding a large deposit in a high-yield savings account earning 4.5% while only remitting the lower passbook rate would be pocketing the difference legally, because the law specifies the passbook rate, not the actual account rate.

What Penalties Apply When a Landlord Skips the Interest Payment

The consequences for failing to pay required interest vary enormously by state, and the severity often surprises landlords who assumed interest was a minor technicality.

Massachusetts has one of the harshest penalty structures. Under M.G.L. c. 186, § 15B, if a landlord fails to comply with any of the security deposit statute's requirements — including the interest payment obligation — the tenant can demand the entire deposit back immediately. If the landlord fails to return it within 30 days of that demand, the tenant is entitled to three times the deposit amount plus attorney's fees. That penalty structure turns a $2,000 deposit dispute into a potential $6,000 judgment.

New Jersey allows tenants to apply the wrongfully withheld interest toward rent and gives courts discretion to award the tenant double the deposit in cases of bad faith. New Jersey courts have interpreted "bad faith" broadly enough to cover systematic non-compliance, not just individual disputes.

Connecticut treats the deposit itself as forfeit if the landlord fails to pay interest: the entire deposit must be returned within 30 days of move-out regardless of any legitimate damage claims, and failure to do so exposes the landlord to double damages.

Chicago's RLTO (Municipal Code § 5-12-082) is direct: a landlord who fails to pay the required interest loses the right to keep any portion of the security deposit and must return the full amount plus twice the deposit as a penalty, plus reasonable attorney's fees. This is a significant financial risk. A landlord holding $2,500 in deposits who fails to pay interest could face a $7,500 judgment plus legal costs.

In states without a statutory interest requirement, the failure to pay interest is simply not actionable — because there is no obligation in the first place. But in states that have the rule, treating it as optional is genuinely risky.

Exemptions and Situations Where the Requirement Doesn't Apply

Even in states with strong interest requirements, there are common exemptions that limit coverage significantly.

Building size: Illinois's state law covers only buildings with 25 or more units. New York's General Obligations Law § 7-103 interest rule applies only to buildings with six or more units. A tenant renting from a landlord who owns a single two-family house may have no interest right at all, even in a state that nominally has the requirement.

Tenancy duration: Pennsylvania's interest requirement only kicks in for tenancies longer than two years. In the first two years, no interest obligation applies regardless of deposit size. For shorter leases — common in college towns and transient markets — the rule simply never triggers.

Property type: Commercial leases are almost universally exempt from residential security deposit statutes. If you're renting office or retail space, no state's residential tenant interest rule applies to you. The parties to a commercial lease are assumed to have bargaining power to negotiate deposit terms.

Subsidized housing: Some states carve out public housing authorities or properties operating under Section 8 Project-Based Rental Assistance contracts, where federal rules about deposits may preempt or supplement state law.

Single-family homes: A few states and local ordinances explicitly exclude single-family home rentals from tenant protection statutes, particularly when the owner is an individual rather than a corporate landlord. California's AB 1482 rent control law, for example, contains a single-family home exemption that state courts have had to interpret in detail.

The practical upshot: a tenant who assumes they're owed interest because their state has the rule should first check whether their landlord's building and their lease length actually trigger coverage. The exemptions exist, and landlords in borderline situations sometimes rely on them in ways that courts have not yet tested.

States With No Interest Requirement: What Tenants Can Still Do

If you live in Texas, Florida, California, Arizona, Colorado, Georgia, or most other states, your landlord almost certainly owes you no interest on the security deposit under state law. That does not mean the deposit is unprotected — those states have other rules about how deposits must be handled, maximum deposit amounts, and timelines for return.

California, for example, caps security deposits at two months' rent for unfurnished units (Civil Code § 1950.5), requires itemized deductions, and mandates return within 21 days of move-out. But there is no interest requirement. The California Court of Appeal confirmed as much in Granberry v. Islay Investments (1994), and no legislature has changed the underlying statute since.

Florida similarly caps deposits, requires landlords to either hold deposits in a non-interest-bearing account or a separate interest-bearing account — but if they choose the interest-bearing option, they must pay only 75% of the annualized average interest rate, or a flat 5% per year, whichever is higher. Wait: Florida actually does have an interest mechanism, but only when the landlord opts into an interest-bearing account. Landlords who choose the non-interest-bearing option, which is equally legal under Florida Statute § 83.49, owe nothing.

For tenants in non-interest states, the realistic options are:

• Negotiate at lease signing: Some landlords, particularly institutional ones, will accept a lease clause specifying that deposit funds will be held in an interest-bearing account and that interest will be credited at move-out. This is uncommon but not unheard of, especially in a tenant-favorable market.
• Minimize the deposit's duration: If you're planning to move, give notice promptly. Interest accumulates over time, and in low-rate environments a year's difference on a $2,000 deposit is trivial, but in a 5% rate environment it's $100.
• Know your return deadlines: Texas requires return within 30 days (Property Code § 92.103). Florida requires 15 to 60 days depending on whether there are deductions. Missing these deadlines gives tenants leverage entirely separate from the interest question.

In short, the absence of an interest requirement does not mean landlords can do whatever they want with the deposit. It means you have one fewer tool in the dispute toolkit.

How to Actually Claim Interest You're Owed

Knowing interest is owed is not the same as getting it. Here is how tenants in covered states typically recover interest that a landlord has failed to pay.

Start with a written demand. Send a letter — certified mail, return receipt — to your landlord stating the amount of deposit held, the period of tenancy, the applicable statute (cite it by section number, which you can find on your state legislature's website), and your calculation of the interest owed. This creates a paper trail and often resolves the issue without any further action. Many landlords simply did not know the rule existed and will pay once confronted with a specific legal citation.

Document the deposit amount and date. Your lease, a bank receipt, or a cancelled check is the best evidence. In Massachusetts, landlords are required to give tenants a receipt for the deposit within 30 days of receiving it, specifying the bank and account number. If your landlord never gave you that receipt, that itself is a violation under M.G.L. c. 186, § 15B(2)(b).

Calculate the interest yourself. Don't wait for the landlord to do the math. Use the applicable rate (check your state's current rate, since several states update it annually), multiply by the deposit amount, and multiply by the number of years. Connecticut's Banking Commissioner publishes the annual rate on the agency's website. Chicago's annual rate is published by the City Comptroller. If the rate changed during your tenancy, calculate each period separately.

If the demand doesn't work, use small claims court. Security deposit disputes — including interest — are almost always within small claims court dollar limits (most states set those limits between $5,000 and $10,000). You do not need a lawyer. The filing fee is typically $30–$75. Bring your lease, your demand letter, the certified mail receipt, and your interest calculation. In states with penalty multipliers, the damages claimed are higher than the interest alone — claim the statutory penalty, not just the underlying amount.

In Chicago specifically, the Metropolitan Tenants Organization and the Legal Aid Chicago office both provide tenant counseling on RLTO claims. Several plaintiff-side tenant attorneys in Chicago take security deposit cases on contingency precisely because the fee-shifting provision makes them economically viable even on small dollar amounts.

Landlord Perspective: How to Stay Compliant Without Getting Burned

If you're a landlord reading this because a tenant just sent you a demand letter, the first thing to do is pull up the statute for your jurisdiction and read it. Not a summary — the actual text. Many deposit disputes hinge on precise language that summaries get wrong.

The operationally simplest approach for landlords in interest-required states: open a separate savings account for each property (or one account per property with a running ledger by tenant), set it up as a high-yield savings account to minimize the gap between what you earn and what you owe, and pay the interest annually. Annual payment, as required in Massachusetts and Connecticut, is easier to track than end-of-tenancy payment because you're not trying to reconstruct years of interest calculations in the heat of a move-out dispute.

For Illinois landlords outside Chicago, it is worth knowing that the RLTO applies to buildings with six or more residential units — not 25. The 25-unit threshold is the state law threshold, but Chicago's ordinance is stricter, and courts apply the ordinance to Chicago properties. A landlord with an eight-unit building in Chicago who relied on the state law threshold and paid no interest has been operating illegally under the RLTO.

The most common software tools landlords use for deposit accounting — AppFolio, Buildium, and Rent Manager — all have trust accounting modules that can track deposits separately from operating funds. None of them automatically calculates the jurisdiction-specific interest rate; that still requires manual input. Setting a calendar reminder each January to look up the applicable rate for your jurisdiction takes about ten minutes and removes the most common source of error.

If you've already failed to pay interest for multiple years, the question is whether to correct it proactively or wait for a tenant demand. Proactive correction — calculating what you owe and sending a check with a brief letter explaining the payment — is almost always the better move. It demonstrates good faith, it stops the interest from accruing further, and in most jurisdictions it substantially reduces your exposure to penalty multipliers, which typically require a showing of willful non-compliance.