Most tenants don't know that in several states, landlords are legally required to pay interest on your security deposit — year after year while they hold it. This isn't just a minor technicality. On a $2,000 deposit held for three years, the interest owed can add up to a meaningful amount. And in states with strong interest requirements, failure to pay can be an independent legal claim on top of your deposit recovery.
Which States Require Interest on Deposits
- Massachusetts: 5% per year or the actual rate earned, whichever is higher — one of the strongest requirements
- New York: Landlords holding deposits for buildings with 6 or more units must keep deposits in interest-bearing accounts and pay interest annually
- New Jersey: Deposits must be kept in interest-bearing accounts and interest paid at least annually
- Connecticut: Interest at the average savings deposit rate, paid annually or at move-out
- Maryland: Interest at 1.5% per year for deposits over one month's rent held more than 6 months
- Iowa: Interest at the current passbook rate if the landlord holds deposits for 5 or more tenants
- Illinois (Chicago): Chicago's Residential Landlord and Tenant Ordinance requires interest at a rate set annually by the city
- District of Columbia: Interest at a rate set by the D.C. Treasurer
In Massachusetts, failure to pay the required annual interest is itself a violation that entitles the tenant to 3× the withheld amount plus attorney fees — separate from any deposit return violation. The interest requirement is taken seriously.
How Interest Is Typically Calculated
Most states use either a fixed statutory rate (Massachusetts at 5%, Maryland at 1.5%) or a variable rate tied to average savings account rates. The interest typically accrues annually and is paid at the time the deposit is returned. Some states require the landlord to send annual interest payments during the tenancy itself. In New Jersey, landlords must notify tenants annually of the account where the deposit is held and the interest earned.
What to Do If Your Landlord Didn't Pay Required Interest
- Determine your state's interest requirement: Check your state's landlord-tenant statute for specific interest rate and payment schedule requirements.
- Calculate what's owed: Multiply your deposit by the applicable rate × the number of years held.
- Include the interest claim in your demand letter: List the unpaid interest as a separate line item alongside any other deposit claims.
- File for both amounts in small claims: Your claim can include the withheld deposit amount plus the unpaid interest, and in states like Massachusetts, penalty damages on top of both.
States Where Interest Is NOT Required
The majority of states — including California, Texas, Florida, Washington, Colorado, and most others — do not require landlords to pay interest on deposits. In these states, the landlord simply holds the deposit in a bank account (or sometimes commingled with their own funds, which is legal in most states) and returns it at the end of the tenancy. Your claim in these states is limited to the deposit itself plus any applicable penalty multiplier for late or improper return.
The Separate Account Requirement
Several states require landlords to hold deposits in a separate, segregated bank account — not commingled with the landlord's operating funds. New Jersey, for example, requires a separate account at a New Jersey bank. This requirement exists primarily to ensure the funds are available for return and to calculate interest accurately. In some states, commingling deposits is itself a violation that can result in forfeiture of the right to make deductions.