A tenant moves out after three years. You return the full deposit on the 14th day, with a clean itemized letter and photos to back up every deduction. Textbook move-out. Then you get served, and the claim is not about a deduction at all. It is about the interest you never paid on the money while you held it.
This is one of the quietest landlord traps in the country. There is no federal law requiring you to pay interest on a security deposit, so most landlords assume it is a non-issue. But about a dozen states and a growing list of cities require it, the required rate often changes every year, and the penalty for getting it wrong is almost never proportional to the dollars involved. You can owe two or three times the deposit, plus the tenant’s attorney’s fees, over an interest figure that would have been a cup of coffee.
This guide covers who actually owes deposit interest in 2026, what the rates are, how to calculate it (simple versus compounded, which matters more than you would think), and the one habit that makes the whole problem disappear: showing the math on the deposit return instead of just a number.
Calculate it first, then read the rules
Plug in the deposit, your jurisdiction’s published rate, and the dates you held the money. The calculator returns the interest owed as simple interest (what most statutes require) and compounded annually, so you can see how far apart they drift on a long tenancy. The rate chips fill in a few common statutory figures, but always confirm the current number against your state or city’s official source.
Notice how small the interest usually is, and how little compounding matters at low rates over short periods. That is exactly why landlords skip it. The mistake is treating the size of the interest as the size of the risk. It is not. The risk is the statutory penalty, and that is set by law, not by the math above.
The big picture: no federal rule, a patchwork of state and city rules
Start here, because it clears up most of the confusion: there is no nationwide requirement to pay interest on a security deposit. As Nolo’s state-by-state summary puts it, the obligation exists only where a state law or a local ordinance creates it. So the question is never “do landlords have to pay interest on deposits” in the abstract. It is “does my state, and my city, require it for this unit.”
Roughly a dozen states have a statewide rule on the books: Connecticut, Illinois, Massachusetts, Minnesota, New Hampshire, New Jersey, New Mexico, New York, North Dakota, Ohio, Pennsylvania, and Virginia. Several others leave it to cities. The result is that two landlords renting identical units a few miles apart, across a state or city line, can have completely different obligations.
A few patterns repeat across almost every interest statute, and they matter more than the headline rate:
- A separate or interest-bearing account is often required. Many of these statutes do not just ask you to pay interest, they require the deposit to sit in a dedicated interest-bearing account, sometimes at an in-state bank. Commingling the deposit with your operating funds can be its own violation, independent of the interest.
- There is usually a holding-period trigger. Interest frequently kicks in only after you have held the deposit for some minimum period (six months and one year are common thresholds). Short tenancies may owe nothing.
- Payment is on a schedule, not just at move-out. Several states require you to pay or credit the interest annually, on the lease anniversary, not in a lump sum when the tenant leaves.
- The rate can reset every year. This is the sneakiest part. In some jurisdictions the required rate is republished each January based on prevailing bank rates, so the figure you used last year may be wrong this year.
For a one-page cross-reference, the law firm Akerman maintains a 50-state security deposit comparison chart that includes the interest column. Treat any aggregator, including this article, as a starting point and confirm the current rule against the primary source before you cut a check.
What the rate actually is in the states that require it
Below are the jurisdictions with the clearest and most-searched interest rules, with the controlling authority for each. Rates and thresholds change, so each entry links to the official source where you can confirm the current figure.
Connecticut: a rate that resets every January
Connecticut General Statutes § 47a-21 requires landlords to pay annual interest on security deposits at a rate set each year by the state Banking Commissioner. The 2026 rate is 0.49%, published as the “deposit index” and announced by the Department of Banking. That index is derived from the FDIC’s national average for savings and money market deposits, which is why it moves with the broader rate environment. Interest is paid annually on the anniversary of the tenancy and can be paid directly or credited toward rent. The practical takeaway: a Connecticut landlord cannot set the rate once and forget it. You have to check the new index every January.
Massachusetts: 5%, with treble damages for getting it wrong
Massachusetts is one of the strictest deposit states in the country. Under G.L. c. 186, § 15B, a landlord who holds a deposit for a full year or more must pay the tenant interest at 5% per year, or the actual interest the account earned, whichever is less. The deposit must sit in a separate, interest-bearing account in a Massachusetts bank, protected from the landlord’s creditors. The penalty provisions are what make this statute famous: as the Mass.gov security deposit overview explains, several violations expose the landlord to triple damages plus 5% interest, court costs, and reasonable attorney’s fees. Failing to pay the interest a tenant is owed within 30 days of the end of the tenancy is specifically called out as a triple-damages trigger.
Minnesota: 1%, and the statute says simple
Minnesota Statutes § 504B.178 is unusually clear about the math, which makes it a useful reference point. Deposits “bear simple noncompounded interest at the rate of one percent per annum.” The statute even tells you the start and end dates for the calculation and excludes any interest amount under one dollar. If you ever wondered whether deposit interest should compound, Minnesota answers it directly for its own deposits: no. Most other interest statutes follow the same simple-interest convention even when they are less explicit about it.
New Jersey: invest it, pay it, or the tenant gets 7% per year
New Jersey’s Rent Security Deposit Act (N.J.S.A. 46:8-19 and following) requires landlords to place the deposit in an interest-bearing account or approved investment and to pay the tenant the net earnings annually, either in cash or as a rent credit. The state’s Department of Community Affairs bulletin lays out the notice and account requirements. The teeth are in the default rule: if a landlord fails to invest the deposit properly or give the required notices, the tenant may apply the deposit plus 7% of that amount for each year it was held against the rent. That 7% is not the market interest rate, it is a penalty, and it dwarfs what the deposit would ever have earned in a bank.
New York: it depends on the size of the building
New York’s rule under General Obligations Law § 7-103 hinges on the number of units. For a building with six or more dwelling units, the landlord must place the deposit in an interest-bearing New York account earning the prevailing rate, may keep 1% per year as an administrative fee, and must pay the remaining interest to the tenant (annually, as a rent credit, or at move-out). For smaller buildings there is no requirement to use an interest-bearing account, but if the landlord chooses to, the same 1%-administrative-fee structure applies and the balance belongs to the tenant. The deposit is held in trust either way and may never be commingled with the landlord’s own funds.
Ohio: 5% on the portion above a threshold
Ohio (Revised Code § 5321.16) requires 5% annual interest, but only on the portion of the deposit that exceeds one month’s rent or fifty dollars, whichever is greater, and only once the tenant has occupied the unit for six months or more. So a deposit equal to one month’s rent on a short tenancy may owe nothing, while a larger deposit held for years can accrue meaningfully. This threshold-and-trigger structure is common, and it is exactly the kind of detail that a generic “5% interest” calculator gets wrong.
Chicago: a tiny rate with an enormous penalty
Chicago is the cautionary tale. The city’s Residential Landlord and Tenant Ordinance (RLTO § 5-12-080) requires interest on deposits held for six months or more, at a rate the city publishes every year. For 2026 that rate is 0.01%, as announced for the year. On a $1,500 deposit, one year of interest at that rate is fifteen cents. And yet Chicago generates more deposit-interest litigation than almost anywhere, because the penalty for not paying it is two times the security deposit plus the tenant’s attorney’s fees and court costs. A landlord can owe a $3,000 judgment, and the tenant’s legal bill on top, over fifteen cents of interest that was never paid on the correct schedule. (There is a narrow cure provision for a miscalculation: pay the corrected amount within 14 days of notice plus a $50 penalty. It does not save a landlord who paid nothing at all.)
Illinois also has a statewide Security Deposit Interest Act (765 ILCS 715) that applies to larger buildings, so a Chicago landlord can be subject to both the city ordinance and the state act. When a city rule and a state rule both apply, follow the one that is more protective of the tenant.
And the others
Maryland, New Hampshire, New Mexico, North Dakota, Pennsylvania, Rhode Island, and the District of Columbia all have their own interest rules, and several California cities (Berkeley, San Francisco, Los Angeles, and others) impose deposit-interest requirements through local rent boards even though California has no statewide rule. Maryland is worth a special mention because the state actually publishes an official deposit interest calculator that accounts for its rate changes over time. If you operate in any of these places, find the primary source for your specific city or county. The Nolo state statutes page is a reasonable index to start from.
Simple versus compounded: why the calculator shows both
The interest formula is the same one you learned for any principal: interest equals principal times rate times time. For a deposit, the principal is the deposit amount, the rate is the statutory annual rate, and the time is the number of years (or fraction of a year) you held the money.
The only real decision is whether the interest compounds. The answer, in almost every security deposit statute, is no. It is simple interest. Minnesota says so in the text of the statute. Most others follow the same convention even when they are less explicit. The calculator above shows the compounded figure too, but that is mostly to demonstrate how little the choice matters at the low rates and short holding periods typical of residential deposits. On a 1% rate held for three years, simple and compounded interest differ by pennies. The gap only becomes meaningful at higher rates (Massachusetts and Ohio’s 5%) held over many years.
Two practical rules:
- Default to simple interest unless your lease or local ordinance specifically calls for compounding. Almost none do.
- When the two figures differ and you are unsure, pay the higher one. Overpaying a tenant interest is never a violation. Underpaying is. The cost of rounding in the tenant’s favor is trivial next to the cost of a penalty.
The part that actually keeps you out of court: documentation
Here is the uncomfortable truth about deposit interest. The calculation is easy and the amount is usually tiny. What sinks landlords is not arithmetic, it is the absence of a record showing they did the arithmetic at all.
When a deposit dispute reaches small claims, the judge is not interested in your intentions. They want to see the deposit amount, the dates it was held, the rate you applied, and the interest you paid or credited. If you can produce that on a single page, the interest issue evaporates. If you cannot, the tenant’s version controls, and in penalty states that can mean a multiple of the deposit. This is the same dynamic that decides ordinary deposit-deduction fights, which is why a defensible itemized deposit deduction and a clear disposition letter matter so much. Interest is just one more line that needs to be shown, not assumed.
Build the habit into your move-out process:
- Record the deposit and the date received at move-in. Interest accrues from the day you take the money, so the start date has to be captured at the start of the tenancy, not reconstructed years later. This is one more reason the move-in record is the foundation for everything that follows.
- Pay or credit interest on the statutory schedule, not only at move-out. Several states require an annual payment on the lease anniversary. If your rule does, calendar it. A missed annual payment is a violation even if you settle up perfectly at the end.
- Confirm the current rate every January in jurisdictions that reset it. Connecticut and Chicago both republish their figures at the start of the year. Using last year’s number is a classic, avoidable error.
- Show the full calculation on the deposit return. Not “interest: $14.20,” but the principal, the rate, the holding period, and the formula. A tenant who can see how you arrived at the number rarely argues with it. A judge who can see it rarely second-guesses it.
That last point is the whole game, and it is the same principle behind why paper trails matter in every other part of property management. The landlords who lose deposit-interest cases are almost never the ones who paid a few dollars too little. They are the ones who cannot prove what they paid, or when, or how they got there.
Deposit interest in one paragraph
There is no federal rule, but about a dozen states and several cities require you to pay interest on a held security deposit. Find out whether your specific state and city are on the list, and confirm the current rate from the official source, because several reset every January. Calculate it as simple interest: principal times rate times years. Pay or credit it on the schedule the statute sets, which is often annually rather than only at move-out. And then do the one thing that actually protects you: show the principal, rate, holding period, and math on the deposit return, so the record proves you paid correctly. The interest is small. The penalty for not documenting it is not.
This article is general information for landlords and property managers, not legal advice. Deposit interest rules, rates, and penalties vary by state and city and change over time. Confirm the current requirement for your jurisdiction with the official source or a local attorney before relying on it.
