escrow account for security deposit

Updated November 2021

Did you know that you might be required to keep the funds given to you as a security deposit for your rental unit in an escrow account? Security deposits often need to be managed in specific ways, but not all landlords know this.

There are laws for where to keep tenant security deposit funds. That’s why it’s important to know how to open an escrow account for this money.

A common mistake is co-mingling security deposit funds with other money in the same bank account. Making this type of mistake can lead to legal or financial trouble down the line, so landlords need to make sure they set things up correctly from day one.

Today, learn more about security deposit escrow accounts and how to set one up. Even if you don’t legally need to use one at this time, learning the process can benefit future business growth opportunities. Let’s get learning!

A Table Of Contents On Security Deposit Escrow Accounts

Not every landlord knows how to open an escrow account or when they need to use this type of account. If you’re unfamiliar with the process, today is your day to learn more about escrow accounts and how to handle them so that you don’t end up in any legal trouble down the line.

What Is An Escrow Account?

what is an escrow accountAn escrow account is a type of interest-bearing savings account used in situations where a third party should be left in charge of some money for a period of time. Typically, escrow accounts are used for safekeeping when money is going to be transferred between two parties, but a delay of that transfer is necessary.

For example, buyers and sellers will often need to transfer money through an escrow account during the process of homebuying, to ensure that everything is properly worked out on paper before the money goes through.

Escrow accounts are offered by financial institutions such as banks and mortgage providers. There are different types of escrow accounts available, and many banks have specific escrow services set up to help landlords and tenants exchange security deposits safely.

Why Are Escrow Accounts Used For Security Deposits?

Some states and local municipalities require that escrow security deposit accounts be used to store the tenant’s security deposit to ensure the money is in a safe, secure fund until it is either utilized or returned to the tenant. Not only does this enable tenants to potentially earn interest on their deposit, but it also makes it easy for everyone involved to know exactly where that money is at any given time.

The amount put down for a tenant’s security deposit can vary widely depending on the property type, location, and size. Regardless of the amount needed for the deposit, the cost of a deposit is always proportional to what the tenant can afford to rent. This means that deposit money is just as valuable to them as money in their savings account, just as the money is valuable to landlords like you who might need to use it to cover repairs or lost rent.

By securing security deposit money in an escrow account, you ensure that the money is not accidentally spent, lost, or misplaced before it is returned or otherwise needed.

Video: Common Escrow Security Deposit Account Issues For Landlords

This video breaks down some of the common issues with landlord security deposit accounts and what to avoid.

We’ve found that working with a Capital One 360 Savings account is often the best solution for landlords managing up to 25 apartment units, as this allows for 25 sub-accounts to individually store each security deposit in an interest-bearing account.

This, however, won’t be the perfect situation for all landlords. Depending on your area, banking options, and how many properties you manage, the best solution might be something else.

In the video above, we mentioned two specific options that might work for you:

In addition to these options, you may simply prefer to work with a local bank. Talking to your preferred banking provider is a great way to get an idea of your options for escrow accounts; they will have the most up-to-date offers for you.

States Info: Who Requires Tenant Security Deposit Accounts?

As mentioned, every state has its own rules about whether or not security deposits need to be placed into a specific account and how that should be handled. Remember that state rules are the broadest. Your county or local jurisdiction may have more specific laws in place about security deposits, so you should check those too.

  • Connecticut – The landlord will need to add interest payments to the security deposit annually. Alternatively, the interest can be credited towards rent. That interest rate should be equal to the average rate paid on savings deposits by insured commercial banks, according to the Federal Reserve Board Bulletin, rounded to the nearest 0.1%. The entirety of the security deposit should be kept in an escrow account.
  • Delaware – The landlord must put the security deposit into an escrow account at a federally-banked institution. This account location must be disclosed to the tenant.
  • District of Columbia – Security deposit funds must be kept in an interest-bearing account used solely for security deposits. If the tenant’s deposit accrues interest, it must be paid to the tenant for each six-month period.
  • Florida – Within 30 days of receiving the security deposit, the landlord must give the tenant the following information in writing:
    • The rate and time of the interest payments
    • The name of the account depository
    • If the funds will be held in an interest or non-interest bearing accounts
    • Landlords who collect a security deposit must include a copy of Florida Statutes § 83.49(3) in the lease
    • Landlords should pay to the tenant any interest that is earned from the security deposit (either at the end of the tenancy or annually)
  • Georgia – Landlords must place the deposit in an escrow account in a state or federally regulated lending institution, and inform the tenant of the location.
  • Illinois – While there are no escrow rules in Illinois, landlords will pay interest on security deposits held for more than six months if they rent 25 or more units in a single building or a complex located on the property. The interest rate should be equal to the minimum deposit savings account rates of the largest commercial bank in the state the calendar year before the tenancy began.
  • Iowa – If the security deposit is held in an interest-bearing account, the landlord pays back earned interest if the tenancy lasted more than five years. If the tenancy was less than five years, the landlord may keep the interest.
  • Kentucky – Landlords will need to disclose the name and address of where the security deposit is being held along with the bank account number. The financial institution used must be regulated by the state or federal government. If the landlord does not keep the deposit in a dedicated account, they lose their right to withhold any of the deposit at the end of the tenancy.
  • Maine – Maine landlords must keep security deposits separate from all other funds. One escrow account can be used for deposits from multiple tenants. Upon request, a Maine landlord must tell the tenant orally or in writing the account number and name of where the deposit is being held.
  • Maryland – Tenants must be given a receipt for their security deposit, and the funds must be placed in a federally-insured account. Landlords pay earned interest on a security deposit of $50 or more. Tenants must be paid any interest accrued annually at the prevailing U.S. Treasury yield curve rate or 1.5%, whichever is greater.
  • Massachusetts – Landlords must pay tenants either 5% interest on the security deposit annually or the amount of interest paid by the financial institution. Accrued interest should be paid annually or within 30 days of the lease terminating. Additionally, security deposit funds should be kept in a separate, interest-bearing account.
  • Michigan – Within 14 days of tenancy, the landlord must give the address of the financial institution where the deposit will be held in an escrow account.
  • Minnesota – While it is not required for security deposits to be placed into an interest-bearing account, landlords must pay non-compounded interest to tenants at the rate of 1% annually on their deposits. Putting it into an escrow account with at least this interest rate is common.
  • New Hampshire – Security deposits must be held in separate accounts from personal finances and not commingled with other assets. The landlord must pay back any earned interest on a security deposit that is held for one or more years. They must also provide a receipt stating the amount of the deposit and where it will be held.
  • New Jersey – New Jersey landlords with more than 10 rental units must place the money into one of the following account types:
    – Money market fund
    – Variable interest-bearing account
    Landlords with less than 10 properties can deposit security deposits into interest-bearing accounts.
    Landlords must pay tenants any interest earned on security deposits, and when this will be paid should be included in your lease agreement for clarity. The landlord must share where the deposit is being held, the amount of the deposit, the type of account, and the current rate of interest.
  • New York – The landlord must disclose the name and address of the financial institution where the security deposit is being held and the amount. If the account is interest bearing, the interest must be paid to the tenant. Landlords may keep up to 1% per annum for administrative fees. Also, landlords of non-regulated units in buildings with six or more units must pay tenants earned interest on the security deposit.
  • North Carolina – All security deposits in North Carolina must be placed into a trust account or furnished as a bond. Within 30 days of tenancy, the landlord must disclose the name and address of the banking institution where the security deposit is located.
  • North Dakota – Security deposits must be placed into an interest-bearing account. Landlords must pay interest on the security deposit if the tenancy lasts at least nine months. If applicable, interest must be paid at the end of the lease.
  • Ohio – While Ohio doesn’t have rules about putting security deposits into specific accounts, landlords must pay tenants interest on any security deposit over $50 or one month’s periodic rent, whichever is higher. In this case, landlords must pay interest on the excess deposit amount at a rate of 5% per year if the tenancy lasts six months or more.
  • Pennsylvania – If the security deposit exceeds $100, the landlord must deposit the funds in a federally or state-regulated institution and give the tenant the name and address along with the deposit amount. Tenants who rent the unit for two or more years are entitled to interest starting with the 25th month of tenancy. However, landlords can keep up to 1% for administrative expenses.
  • Tennessee – Landlords must put security deposits in a separate account. Account location must be disclosed to the tenant either orally or in writing.
  • Washington – Landlords must place the security deposit in a trust account solely used for security deposits. The landlord must tell the tenant the name and location of the bank where the deposit is being held alongside a receipt. Landlords may keep all interest accrued unless otherwise agreed-upon.

Even if your state does not require you to hold security deposits in a specific account type, it can be good practice to do so. Storing security deposits in this way offers security on the funds and great customer service to your tenants. Ultimately, it is up to you if your state or local municipality does not require this type of banking.

Additional Account Resources For Landlords

additional account resources for landlordsThere’s still more to be learned about accounts, security deposits, and all related topics. Our RentPrep State Resources are a great reference guide for your state’s laws, to see any regulations specific to your area regarding security deposits. Another helpful resource on landlord-tenant laws is the Nolo State Resources page.

There is a lot to learn in the rental business, and that’s especially true as a new landlord. Here at RentPrep, we’ve put together a complete Landlord Starter Form Kit that you can get today. These sample forms will help get your rental business documents in order, so you’re ready to grow in no time.

FAQs On How To Open An Escrow Account

As a landlord, it’s important to know the process behind starting an escrow account.

Do I need a separate bank account for a security deposit?

In most cases, you must put security deposits into a different bank account than the business account used for the rest of your rental business.  Many states have specific rules about when security deposits must be deposited and how information about where the money is being held should be communicated to tenants.

While you might not be required to separate the money this way, most landlords find it preferable to do so.

By separating security deposits from other funds, there is no risk of confusion or accidental loss of that money. It must be held to be returned to the tenants or used to cover incidentals after the rental period, so you want to be sure you are not putting anything at risk.

Additionally, tenants will appreciate knowing where the security deposit is being held. Tenants understand that they will be getting this money back, but having specifics always grants peace of mind when managing large sums.

What kind of account is for a security deposit?

When security deposits are put into a bank account, most landlords use interest-bearing savings accounts known as escrow accounts. Some banks call these tenant security accounts as they are smaller than larger escrow accounts that are more commonly seen in large real estate management companies.

Your local laws may require a specific type of escrow account; other states allow any type of savings account to be used. Additionally, you’ll need to consider what your bank offers. Citizens Bank, for example, offers a few types of escrow and landlord-tenant management accounts depending on your specific situation.

Often, you will be able to set up one account and pool all of the security deposits into that account. If your state does not allow this practice, banks will often be able to subdivide the account for each unit to help streamline your financial management into as few open accounts as possible.

How do you account for a security deposit?

It can be confusing to know whether a security deposit should be filed into part of your business accounting, but the answer is simple: yes!

All money received or paid out by your business needs to be included in your business finances. In terms of accounting, security deposits you hold onto should be tracked as a liability since you are responsible for money that is not truly yours. Even if it is put into an escrow account, you need to add this information into your business’s overall finance tracking.

Landlords troubled by the accounting or financial aspect of business can benefit from working with a certificated accountant to get their setup in order.

How do I open an escrow account for a security deposit?

The easiest way to set up an escrow account is to visit your local bank or credit union, either in person or online. By connecting with the employees there, you’ll be able to quickly begin the process.

In most cases, you will need the following information, at a minimum, to set up the security deposit account:

  • Your social security number
  • Your business tax ID number (TIN), if applicable
  • A copy of the lease agreement

Different banks may have additional paperwork that is needed to set up the account. Some banks will be able to set up one primary account that you can later subdivide as you collect more security deposits; this type of account makes it easier than ever to manage multiple accounts.

Some banks even set these accounts up as a landlord-tenant account with both parties involved; this keeps the communication as open and thorough as possible.

How do I get an escrow account for rent?

Suppose you and your tenant are disagreeing about the management of the property. In that case, your tenant may request that they begin paying rent into an escrow account until the situation is managed. Many states allow this type of escrow payment whenever there is a disagreement. It ensures that the landlord will get paid and, at the same time, gives the tenant the peace of mind that their issues will be seriously addressed and remedied before the funds are released.

No landlord wants to end up in this situation, but it’s a good idea to know what to do, just in case. Setting up an escrow account for rent is generally the same process used to set up a typical bank account. In this case, however, your tenant is going to need to be involved in setting up the account.

Pending state and bank rules, the tenant may be solely in charge of setting up the account. They will need to provide their SSN and other identification information, and then they can begin paying rent into that account until the money can be dispersed to you.

How does escrow work?

An escrow account is a type of bank account that is managed by a third party to ensure that no money is released until specific conditions are met. Once money goes into the account, the funds will not be released except under the terms established when the account was created. This means that escrow keeps the money from being withdrawn without notice or in a way that would hurt the other party.

Escrow provides peace of mind to everyone involved when ensuring that money is where it is supposed to be and bills will be paid on time.

What does it mean to put rent in escrow?

Putting a month’s rent in escrow does not happen often, but there are some situations where this process might be used.

The most common situation where you might see rent put into escrow is when there is a disagreement between a landlord and a tenant.

If a tenant doesn’t believe the landlord is keeping up with their end of a rental agreement, they may begin to pay each month’s rent into an escrow account rather than directly to the landlord. They would need to learn how to open an escrow account for rent and maintain it properly.

By doing this, the tenant shows their willingness and ability to pay the month’s rent without actually releasing money to a landlord who is not doing their job. Once the conflict is settled, the money is released as determined in any court case or settlement.

This practice happens in Minnesota as well as in some other states, though the specifics of how escrow should be used may vary.

How long can you keep money in escrow?

While the period for escrow during the home buying process is usually around 30 days, escrow bank accounts don’t typically have a time limit. Security deposit accounts used by landlords, in particular, will be open as long as necessary to hold the security deposit and then return it to the tenant.

Specific financial institutions may limit the length of an escrow account, but there isn’t a specific limit to how long money can stay in escrow for security deposits.

Key Takeaways: Escrow Account For Security Deposit

As mentioned in the video above, a small amount of money lost in the shuffle of security deposits and earned interest could actually hold up your bigger plans, such as selling one of your units. It’s key that you learn how to open an escrow account to prevent issues down the line.

Keeping security deposit funds in separate accounts is good practice regardless of your state laws, as it makes keeping track of security deposits easier.

Be sure that whatever you decide to do, follow your state’s rules so you’re not left in a bad spot when you try to keep security deposit funds to cover damages.