A security deposit safeguards a landlord in the event a tenant breaks a lease or damages a rental unit. The deposit belongs to the tenant during the lease period; the landlord simply holds the money in a trust or escrow account and reserves the right to withhold it to cover unpaid rent or repairs. Each state regulates the handling of security deposits, and landlords in about a third of all states must pay interest on security deposits. Look into the state laws that govern your security deposit to figure out the interest due.
Interest-Bearing Rules Vary
The laws on interest-bearing accounts for security deposits vary by state and property type. A state's security deposit or landlord-tenant laws may govern a rental deposit. Also, different rules can apply to larger complexes or rent-controlled units. For example, deposits on New York rentals that have rent control or are part of a six-unit or larger building must bear interest. In New Jersey, landlords must use interest-bearing accounts on all residential rentals, unless the property is owner occupied and has three or fewer units. Local ordinances may require landlords to pay interest on security deposits, even if the state doesn't. For example, rent-controlled units in San Francisco and Los Angeles require interest-bearing escrow accounts.
Figuring out Amounts Due
Tenants earn simple interest on security deposits. This means that interest is paid on the initial deposit, or principal, which makes calculating the interest due fairly easy. Depending on the law and lease agreement, interest must be paid annually or after you move out and may be credited toward rent.
Multiply the interest rate by the principal, or security deposit amount. You can use a simple-interest calculator from a website, such as WebMATH.com or the basic formula (P I) to calculate interest due, with "P" representing principal and "I" the interest rate. For example, if the interest rate is 1 percent, or .01, and the deposit amount is $2,000, the formula for one year's interest is: $2,000 .01, and the interest due is $20.
Typical Interest Rates
The state, jurisdiction or institution holding the deposit can set the interest rate. Find out the interest rate that applies to a deposit by checking the annual escrow statement, which must be sent each year to tenants. You can also check a jurisdiction's website to find the annual interest rate it has set for the entire year. For example, Chicago requires interest-bearing accounts for security deposits on rent-controlled units. At the time of publication, the rate was .01 percent.
Administration Fees Affect Returns
A landlord may be allowed to collect an administrative fee for managing the trust account. To calculate the amount due to a tenant after administrative fees are deducted, apply the formula of (P I) - (P A). For example, the landlord may be entitled to an administrative fee of 1 percent on a $1,000 deposit with an interest rate of 2 percent. The formula is ($1,000 .02) - ($1,000 .01), or $10.