How Should You Store the Security Deposits?

Store a tenant's security deposit in a bank account that holds only deposits, never in your personal or operating account. New York and New Jersey law say the deposit stays the tenant's money, held by you in trust, and Massachusetts, New Jersey, New York, Florida, Pennsylvania, and Washington each set rules on the type of account, the bank's location, or a written notice naming the bank. Several of those states also make you pay the tenant interest. California and Texas have no statewide account rule, though San Francisco requires interest on deposits held more than a year.

Which states tell you where to hold the deposit?

If your state is not listed, read its deposit statute before you open the account, and check your city's rent board or housing department.

In Massachusetts, a deposit held outside a qualifying account must be returned to the tenant immediately, and the tenant can sue for three times the deposit. The Massachusetts security deposit laws for landlords cover the receipts and the 30-day return. The amount you collect is a separate question with its own state caps; see how much you can charge for a security deposit.

What does the ban on commingling mean?

Commingling means mixing a tenant's deposit with your own money. New York, New Jersey, and Florida prohibit it in their statutes, and Florida adds that you cannot pledge or use the money until it is actually due to you. In practice:

1. Open a dedicated account before you collect the first deposit. Massachusetts legal aid guidance says the account name must show the money is not yours, so title it as a security deposit or trust account.
2. Deposit each tenant's money into that account, not into rent or operating accounts. New Jersey expressly allows one account for all your tenants' deposits as long as you meet the other rules.
3. Keep a ledger for each tenant with the amount, date received, account, interest credited, and any later deductions. Texas requires accurate deposit records even without an account rule.
4. Do not pay the mortgage, repairs, or turnover costs from the account while the tenant is still in the unit. Move money out only when you return it, apply a lawful deduction after move-out, or transfer it to a buyer.

New Jersey makes knowingly diverting deposit money a disorderly persons offense, with a fine of at least $200. California, Texas, and Washington give the tenant's claim to the deposit priority over your creditors, including a bankruptcy trustee.

What notice must you give after you collect the deposit?

Several states require a written notice that tells the tenant where the money is:

• Massachusetts: a bank receipt within 30 days with the bank's name and location, the amount, and the account number.
• New Jersey: for rentals covered by the law, within 30 days, the bank's name and address, the type of account, its current interest rate, and the amount. Send it again within 30 days after you move the deposit, at each annual interest payment, and within 30 days after you buy a building with tenants in place. A tenant who does not get a required notice can direct you in writing to apply the deposit, plus 7% annual interest, to rent. For a missed annual notice that is not also notice of an account or institution change, the tenant must first give you written notice of the failure and allow 30 days from mailing or hand delivery to comply. The New Jersey security deposit laws for landlords explain that remedy.
• New York and Pennsylvania: once you deposit the money, a written notice with the bank's name and address and the amount.
• Florida: in the lease or within 30 days after receiving the deposit, the depository's name and address (or that you posted a bond), whether the tenant earns interest, and the statute's printed disclosure. Send a new written notice within 30 days after you change how or where you hold the deposit. Landlords with fewer than five units are exempt from these notices but not from the account rules. See the Florida security deposit laws for landlords.
• Washington: a written receipt for the deposit and the name, address, and location of the depository, plus notice of any later change.

How do you calculate and pay interest?

New York example (6 or more units). A $2,000 deposit sits in an account paying 3% a year. It earns $60 for the year. You may keep 1%, or $20, and the tenant is owed $40.

San Francisco example. The Rent Board rate for March 1, 2026 through February 28, 2027 is 4.2% simple interest, and it applies to deposits held more than one year in all residential rental units except those with government-assisted or subsidized rent. On a $3,000 deposit held a full year, you owe $3,000 x 4.2% = $126 on the anniversary of the date you received it. If the tenant moves out after the first year, prorated interest is due within two weeks of move-out.

Payment timing differs by state. Florida requires payment or a rent credit at least once a year, but owes no interest to a tenant who wrongfully ends the tenancy early. New Jersey lets you pay in cash, credit it toward rent at renewal or the lease anniversary, or pay on January 31 after written notice. In Massachusetts, a tenant who receives neither the interest nor the annual statement within 30 days after the tenancy year ends may deduct the interest from rent.

How are security deposits taxed?

IRS Publication 527 (2025) gives three rules:

• A deposit you plan to return is not income when you receive it.
• Any part you keep because the tenant did not meet the lease terms is income in the year you keep it.
• A payment called a security deposit that will be used as the final month's rent is advance rent, and it is income in the year you receive it.

Example: you collect an $1,800 deposit in 2026. The tenant moves out in 2027 and you keep $400 for damage beyond normal wear and tear. You report $400 as rental income on your 2027 return and report nothing for the deposit in 2026. What security deposits are usually used for covers which deductions are lawful.

What happens to the deposits when you sell the property?

The deposits, and any interest owed, follow the tenants to the new owner:

• Massachusetts: transfer the deposits and interest to the buyer. The buyer has 45 days to notify each tenant; if that notice is not sent, you must return the deposit with interest.
• New Jersey: turn the deposits and interest over to the buyer at the deed delivery or within five days after, and notify each tenant by registered or certified mail with the buyer's name and address.
• Florida: transfer the deposits with interest and an accounting at closing; a written receipt from the buyer releases you.
• Texas: the buyer is liable for the deposits from the date it takes title and must give each tenant a signed statement of the amount. You stay liable until the buyer receives the money or assumes it.
• California: transfer the remaining deposit to the buyer, or return it to the tenant minus lawful deductions, and notify the tenant in writing.
• Washington: move each deposit into the buyer's equivalent trust account; the buyer must tell the tenant about the transfer and the new depository.

If you are the buyer, get a written list of each tenant's deposit, interest owed, and account before closing. When a tenant later moves out, the return steps are in what the process of returning a security deposit is, and the other early-tenancy tasks are in how to help your tenant get set up.