Do you really deal with interest for security deposit?

Question

Was just wondering, if many of here would deal with paying interests for security deposits?

In our Florida standard FAR/BAR residential lease contract there is this...

"If Tenant has paid a security deposit or advance rent the following provisions apply:
	A. Landlord shall hold the money in a separate interest-bearing or non-interest-bearing account in a Florida banking institution for the benefit of Tenant. If Landlord deposits the money in an interest-bearing account, Landlord must pay Tenant interest of at least 75% of the annualized average interest paid by the bank or 5% per year simple interest, whichever Landlord chooses. Landlord
	cannot mix such money with any other funds of Landlord or pledge, mortgage, or make any other use of such money until the money is actually due to Landlord; or
	B. Landlord must post a surety bond in the manner allowed by law. If Landlord posts the bond, Landlord shall pay Tenant 5% interest per year. At the end of the Lease, Landlord will pay Tenant, or credit against rent, the interest due to Tenant. No interest will be due Tenant if Tenant wrongfully terminates the Lease before the end of the Lease Term. If Landlord rents 5 or more dwelling units, then within 30 days of Tenant’s payment of the advance rent or any security
	deposit, Landlord must notify Tenant in writing of the manner in which Landlord is holding such money, the interest rate, if any, that Tenant will receive, and when such payments will be made."

So do you all put the security deposits aside and pay the tenant back with interest?

Steve Babiak · Answer

Aly NA - my experience with TD Bank is that the tenant must be named as Customer #1 on the application and the landlord as Customer #2, otherwise the landlord will get the 1099-INT.  And the amount of the interest paid in any year for all accounts at the bank must be $10 or more to get sent a 1099-INT; so you might not realize that the interest is being reported as paid to the landlord until you as a landlord have other accounts that get paid enough interest to get the 1099-INT.  And you must have the tenant fill out a W9 form (available on the IRS website) in order to open the landlord tenant account (with tenant as Customer #1 in the case of TD Bank).

As @David Krulac pointed out, PA law requires something similar.  I let the bank-paid interest accumulate in the tenant's security deposit account.  The bank is already in the business of doing all the proper things when paying interest to an account, so I don't really have to do anything special after getting it set up correctly.

Bill S. · Answer

@Sam Leon if it's in the "standard" contract, it's likely state law. Check that out. If it's state law, do not ignore it. As others have stated, there are ways of addressing it. Find out what's allowed and select what works best for you. Ignoring it (even though it's litterly pennies) will severely compromise you if you ever end up in front of a judge for your security deposit.

Shaun Reilly · Answer

Here in MA you are required to have separate accounts for your deposits and pay the tenants the interest annually.  Actually just had a couple people come up on their anniversary so they will be getting their ~$1.50 check in time for Christmas!  I will do it since MA is as tenant friendly as they come and if you don't handle things right it could hurt you if you ever had to evict and you also can be libel for treble damages.  Also the issue there is that it isn't clear if the damages are on the unpaid interest or the entire deposit.  Sure might be worth rolling the dice to save the hassle of sending a check if you are capped at owing an extra $3-5 but a bit different if you might have to pay $3,000 or something.

I also invest in PA and my understanding for there is that you have to hold the deposits in an interest baring account but they don't have to be all separate.  While this would be a major accounting pain in general you can take an administrative fee of up to 0.5% so as long as rates are as crappy as they are you don't actually have to distribute the interest.  FYI this advice was given to me by my local attorney there who is also a landlord and handles his deposits like this.

Aly W. · Answer

Right @Steve Babiak, the tenants and I are named as you said. The interest is visible in the accounts, but not dispersed. All tenants have filled out W9s when the accounts were opened - 1099 was incorrect.

Victor N. · Answer

in CT you are required to pay interest on the security deposit ( in MA too). Most banks have accounts specifically made for tenants deposits. I have used TD Bank and BoA with no problem. You can open multiple tenant accounts at the same bank but the money is kept in separate accounts so it is very simple in term of tracking interest.

David Krulac · Answer

Here in PA, the state law requires that you pay interest after the second year.  A local bank here will set up the escrow account and a separate sub account for each tenant with interest (very small) accruing to the tenants SSN.  The tenant can not withdraw the money must be withdrawn by the landlord.  The bank does not charge for this service.

Justin B. · Answer

I called my bank and opened up an account for deposits and specifically requested it not pay interest.  That way I don't have to worry about it.  I read the same thing in TN and I said to myself, no way am I going to bother myself with worrying about paying my renter interest (which would be pennies).Worse yet, if there are multiple deposits in the "deposit account", I have to worry about figuring out the distribution too?  No thanks.  Non-Interest bearing account please :)

Aly W. · Answer

TD Bank offers tenant/landlord security deposit accounts with interest, but they disperse the interest, not the landlord. And the interest amount must be at least $10 or so before they will cut a check to the tenant, who has to provide a 1099 when the account is opened.

Given that the interest rate on that kind of account is about a quarter of one percent, tenants only get a few cents or dollars if/when the account is closed.

Tom S. · Answer

I invest in Vermont and one of the cities does require interest to be paid on the deposit, although the language is not nearly as complicated as what you posted.  For my property in that city, yes, it's simple to set up a different account at the same bank I do business with, and to refund the deposit and interest at the end of the year.

- Tom

Bill Gulley · Answer

You can get around most state requirements by stating that

"it is agreed that any interest accrued on any escrow or deposit shall be due the landlord for the costs and expenses for the maintenance of such account."

There may be statutes against this, so check.

The other issue is that a true escrow account has no interest paid, so tell the bank that it is an escrow account, they will inform you of how they must treat that account.

Fines for violations of escrow accounts can be substantial, so investigate how they are handled in your state.   :)