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

Landlord and tenant signing a lease agreement

Finding new tenants can be challenging, especially if you consider the number of regulations that landlords need to abide by. Depending on the state you’re in, some of these laws may govern security deposits and what you need to do to collect them.

Each state is different, so you need to pay close attention to the different requirements set forth by the local law. At the same time, learning how to open an escrow account for security deposit purposes can save you a huge amount of hassle down the line.

Below, we’ll define escrow accounts for security deposits. We’ll also discuss how these accounts work and share the states that require landlords to keep the security deposit in escrow.

Finally, we’ll go over the steps you need to follow to open an escrow account for a security deposit.


What Is an Escrow Account for Security Deposits and Why Is It Important for Landlords?

Before learning how to open an escrow account, it’s essential that we define security deposits and explore the role that escrows play.

For starters, an escrow account is a bank account that’s designed to hold funds in a neutral or non-operational account. The idea is to ensure that the funds will be available when the tenant moves out.

The exact requirements of escrow accounts are sometimes defined by the municipal or state government. For example, some states require that escrow be held in interest bearing accounts and that some or all of the earnings are transferred to the tenant.

Some of the benefits of escrow accounts for landlords include:

  • It’s easy to guarantee complete transparency
  • Escrow accounts help property managers abide by local regulations
  • The management of the security deposit becomes the responsibility of the escrow provider

How to Open an Escrow Account for Security Deposit

The process you need to follow to open an escrow account may vary slightly depending on the provider you choose. With that said, the general steps you should follow look something like this:

  • Research all potential service providers
  • Choose a provider that meets all your requirements
  • Determine how many months of rent you can charge for the deposit
  • Charge the security deposit and make sure it’s deposited into the escrow
  • At the end of the tenant’s lease, refund the appropriate amount

States that Require Escrow Accounts

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.

How to Open an Escrow Account for Security Deposits with Baselane?

Baselane is a next-generation banking solution designed for landlords. Our goal is to provide independent landlords with comprehensive tools that empower them to take control of their businesses.

In short, Baselane contains features like tailored financial services, automation tools, and in-depth reporting that unveils areas of improvement, which in turn, offer opportunities to grow and boost your revenues.

In this section, we’ll share the three simple steps you need to follow to open a security deposit for landlords in Baselane.

1. Open Baselane Banking Account

Baselane provides an entire financial ecosystem designed for landlords. The first step is to create an account using your email address. It’s completely free and the process takes as little as 3 minutes.

Opening a Baselane account doesn’t impact your credit score.

You’ll be asked to provide documents for identity verification purposes, and if you want to obtain a business bank account, you’ll need to be officially registered in the US and provide details like your federal EIN.

2. Open Virtual Account

Once you create your profile, you can add different accounts as a sole proprietor (independent owner) or a private business entity.

3. Start Collecting Security Deposits to Virtual Account

After opening one or more accounts, you can organize them as you please and start collecting security deposits through each one of them.

You can also set up your rent payments to these accounts if you’re set up like a business and potentially apply to an account with high-yield checking and cash-back rewards.

Final Thoughts

As a landlord, it’s your responsibility to understand and abide by the laws and regulations that apply to your state or county. This includes security deposit escrow laws, which may set requirements on how these funds have to be collected, stored, and managed.

Escrow security deposit accounts can help ensure that you meet these laws and regulations. And, even if you don’t live in an area that has these laws, an escrow account is a great way to save yourself time and avoid hassles later on.

To learn more about setting up an escrow account and using it with your tenants, visit our landlord banking page.


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Financial Technology, Real Estate Investing, and Property Management, Accounting and Tax, Finance
Saad started his career as a Certified Public Accountant (CPA) working for a top-tier accounting firm. He was responsible for helping audit alternative investment funds. He later worked at a hedge fund where he was responsible for preparing financial statements and implementing new technology. He also ran a successful private tax practice for five years.

After completing his MBA at Duke, Saad joined The Boston Consulting Group to do management consulting. At BCG his experience spanned several industries and growth projects across Pharma, Retail, and Technology companies. His passion for democratizing finances led him to Plaid, a fintech, where he worked with large Banks and Financial Institutions to make finances and money easier for all.
Landlord and tenant signing a lease agreement
How to Open an Escrow Account for Security Deposit: A Step-by-step Guide
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