How to Open an Escrow Account for Security Deposit: A Step-by-step Guide

A total of 25 states had laws surrounding landlord security deposit account requirements and escrows at the time of this writing.

Note: How each state defines an escrow account also varies. Some require the escrow account to be held in a bank that is located in the state, and there are varying requirements of who the escrow account is named after, under what circumstances landlords can withdraw funds and who retains the interest income earnings from such accounts. Consult a local lawyer to ensure you adhere to state and city requirements.

The exact requirements for collecting and reimbursing the security deposit vary depending on the state.

Here’s a brief overview of the states that require escrows and a brief description of each one’s requirements. :

Connecticut – Escrow required, landlords must pay tenants any accrued interest

Delaware – Escrow from a federally-insured institute is required, location of funds must be disclosed by landlord

District of Columbia – Interest-bearing escrow from a federally-insured institute is required, landlord is required to disclose location of the funds to tenants

Florida – Escrow from a Florida-based bank required, landlord must disclose several pieces of information in addition to the location of the institute

Georgia – Escrow required for landlords that own more than 10 central units OR if the management of the property is handled by third parties

Illinois – Landlords with more than 25 rental units are required to use an interest-bearing escrow and adhere to additional requirements

Kentucky – Escrow from a Kentucky or US regulation institution is mandatory and landlords must disclose distinct details to their tenants

Maine – No escrow as such is required, although security deposits must be stored in a separate bank account and can not be mixed with other funds

Maryland – Escrow required from Maryland-based, interest-bearing financial institutions

Massachusetts – Escrow required from Massachusetts-based, interest-bearing financial institutions and landlords are required to provide details about the account to their tenants

Michigan – Escrow from a regulated financial institution is required

Minnesota – Deposits have to be kept in standard non-compound interest account with a 1% annual rate

Missouri – Escrow from a federally-insured institution required

New Hampshire – If landlords hold security deposits for one year or longer, they have to match the interest rate paid on regular savings account in the New Hampshire bank

New Jersey – The escrow requirements for tenant deposits vary based on whether the landlord has 10 or more units. Interest must be paid on all deposits regardless of the number of units owned.

New York – Landlords are required to use an escrow if the building has more than six units and pay interest to the tenant, minus administrative fees

North Carolina – Escrow required from a licensed and federally-insured institution that’s registered in the state, landlords must disclose location of the funds and other details to tenants

North Dakota – Interest-bearing escrow from a federally-insured institution required, interest has to be paid to the tenant at the end of the lease

Oklahoma – Security deposits must be held in an escrow account with a federally insured institute located in Oklahoma, although it’s not required by law (41 OK Stat 115(A)).

New Mexico – If the security deposit is over one month’s rent, it is required to yield interest annually at a rate equal to passbook interest, as per N.M. Stat Ann 47-8-18(A)(1).

Ohio – Escrow required for deposits larger than $50 or one month’s rent, interest must be paid to the tenant

Pennsylvania – Escrow required for deposits over $100 from an institution regulated by the Federal Reserve Board, the Federal Home Loan Bank Board, the Comptroller of the Currency, or the Pennsylvania Dept. of Banking

Tennessee – Escrow required from a licensed and federally-insured institution

Washington – Escrow required from a licensed institution in Washington or service providers defined by local regulations

In these 3 states, interest-bearing accounts are suggested but not required for security deposits.

Idaho – It’s advised but not mandated to keep deposits in interest-bearing accounts; the lease should detail the escrow financial institution and the planned use of the deposit at tenancy end (Attorney General Handbook pg. 6 & 25).

Iowa – Although not required, if deposits are in an interest-bearing account, the interest for the first five years goes to the landlord and thereafter to the tenant; deposits shouldn’t mix with the landlord’s personal funds (Iowa Code 562A.12(2)).

Alaska – Interest-bearing or escrow accounts are not legally required; however, it is recommended to avoid potential disputes.

Whether you live in a state with legal escrow requirements or not, learning about banking for rental property can save you a significant amount of hassle.