Do Landlords Have to Pay Interest on Security Deposits? The 2026 State Guide

A tenant moves out after three years. The landlord returns the full deposit on time, with a clean itemized letter and photos to back up every deduction. Textbook move-out. Then the landlord gets served, and the claim is not about a deduction at all. It is about the interest that was never paid on the deposit while the landlord held it. This is one of the quietest landlord traps in the country, and it exists because there is no federal rule, so most landlords assume it is a non-issue.

The short answer: about a dozen states say yes

There is no federal law requiring interest on security deposits. But roughly a dozen states require it, plus cities like Chicago, and the required rate often changes every year. The states most commonly cited are Connecticut, Illinois, Massachusetts, Minnesota, New Jersey, New Mexico, New York, North Dakota, Ohio, Pennsylvania, and Virginia. Rates run from about 0.01% to 5% per year, and interest is almost always simple, not compounded.

Here is the catch that keeps small landlords out of trouble, and that keeps big ones in it: these laws rarely apply to everyone. They come with thresholds.

The thresholds that decide whether you owe it

Most states with interest requirements only impose them on certain landlords or deposits. The patterns repeat from state to state:

Notice how different the triggers are. Illinois keys off building size. Pennsylvania and Ohio key off the deposit amount and holding period. New Mexico keys off whether the deposit exceeds one month's rent. A landlord who owns a four-unit building in Chicago and a four-unit building in New York City can owe interest in one and not the other. The rule follows the address, not the landlord.

If you own rental property in more than one state, check each state separately. Deposit interest rules are local, and the threshold that exempts you in one state will not protect you in another.

The math: simple, small, and still worth doing right

Calculating it is almost insultingly easy, which is what makes skipping it so strange. Simple interest: deposit times rate times years. A $2,000 deposit held 3 years at Massachusetts' 5% rate earns $300. The same deposit in a state with a 0.5% annual rate earns $30. Nobody is getting rich off this money, tenant or landlord.

But the penalty for getting it wrong is almost never proportional to the dollars involved. In Chicago, a landlord who skips the interest can face liability for twice the deposit. Massachusetts adds treble damages and the tenant's attorney's fees. In New Jersey, the tenant can apply the deposit plus 7% per year against rent due. You can owe two or three times the deposit, plus fees, over an interest figure that would have bought coffee.

My take

I think most landlords who miss this are not scofflaws. They are people who read their state's deposit statute once, years ago, and never noticed the interest paragraph, because the dollar amounts feel too small to matter. The fix is a habit, not a law degree: when you return a deposit, include a one-line interest calculation on the statement, even if the answer is zero because the statute does not apply to you. If you are ever challenged, the line that says "interest: $0, not required under [statute]" does more for you than any argument you could make after the fact.

Related reading: California Security Deposit Limit in 2026: The 1 Month Rule After AB 12 · What Happens When a Landlord Misses the Security Deposit Deadline.

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General information, not legal advice. State rules summarized from published 2026 compilations; rates and thresholds change. Confirm your current statute before acting.