Updated: 12 Mar 2025
10 Min Read

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

Financial Technology, Real Estate Investing, and Property Management, Accounting and Tax, Finance Saad Dar

Escrow accounts for security deposits offer protection and peace of mind for both landlords and tenants. It’s a secure way to handle funds, ensuring the deposit is available when it’s time to return it or use it for repairs.

In this guide, we will walk you through setting up an escrow account, state requirements, and the essentials of using an escrow account.

Key Takeaways

An escrow account for security deposits is a separate non-operational account managed by a third party.
Certain states require an interest-bearing security deposit account (some don’t require interest).
Landlord escrow accounts provide financial protection, transparent records, regulatory compliance, and offload management responsibilities.
Landlords can set up a free security deposit account with Baselane in 3 easy steps: open an account, set up virtual accounts, and collect security deposits.

What is an escrow account for security deposits?

An escrow account for security deposits is a separate, neutral, and non-operational account where landlords hold a tenant’s security deposit.

This landlord security deposit account is managed by a third party, ensuring that the funds are used only for their intended purpose, such as covering damages or unpaid rent at the end of a lease.

The municipal or state government sometimes defines the exact requirements of escrow accounts. For example, some states require security deposits to be held specifically in an escrow account, while others simply require deposits to be held in a dedicated account.

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Benefits of opening an escrow account for security deposits

Financial protection

An escrow account for rent offers financial security for landlords who may need to keep some or all of a tenant’s security deposit. For instance, if a tenant causes significant property damage beyond normal wear and tear, the landlord can use funds from this account to cover the costs of repairs.

Transparent record-keeping

With an escrow account for renters, landlords and tenants can track how and when a security deposit is used. Landlords can easily demonstrate legitimate use of funds for repairs or unpaid rent. Plus, a separate rental escrow account provides a clear record of any security deposit deductions in case of disputes.

Regulatory compliance

In most states, landlords must hold deposits in a separate account. It’s usually an interest-bearing account, although this isn’t always required.

Even when it’s not mandated, an escrow account keeps deposits separate from other funds. This simplifies security deposit returns, which have strict deadlines in every state. It also makes security deposit accounting easier for taxes.

Management responsibility

A tenant escrow account provider company or bank holds security deposit funds until it’s time for a refund or repairs after a tenant moves out. This setup offloads managing security deposits, but landlords are still responsible for handling deductions and security deposit returns.

Do landlords have to keep security deposits in escrow accounts?

Landlords are only required to hold security deposits in an escrow account in certain states. Generally, security deposit escrow accounts have regulations for earning interest or preventing the commingling of security deposits with personal funds (or both).

Depending on state laws for where to open an escrow account for security deposit funds, landlords can use a state or national bank, trust company, savings bank, or savings and loan association. In some states, landlords must provide tenants with the name and address of the banking institution where the deposit is held or the specific account number.

There are also varying requirements for the name on an escrow account, the situations in which landlords can withdraw funds, and who gets to keep the interest accrued on deposits. Consult a lawyer to ensure you adhere to state and city security deposit laws.

State laws for escrow accounts

How each state defines an escrow account varies, along with the rules for collecting and reimbursing a refundable security deposit.

Here’s a brief overview of security deposit laws for escrow accounts in all 50 states:

State	Escrow Account Required	Additional Guidelines	Security Deposit Amount	Deductible Funds	Deadline for Returning Funds
Alabama	No	N/A	1 month’s rent	Repairs, unpaid rent	60 days
Alaska	No	Trust account in bank or savings/loan association, or with licensed escrow agent. Must provide tenant with conditions of refund and information on potential deductions.	2 months’ rent (if certain conditions are met)	Repairs, damages	14/30 days
Arizona	No	N/A	1.5 months’ rent	Repairs, lease violations	14 days
Arkansas	No	N/A	2 months’ rent (if certain conditions are met)	Repairs, lease violations, cleaning costs	60 days
California	No	N/A	2 months’ rent (unfurnished); 3 months if furnished	Repairs, lease violations, cleaning costs	21 days
Colorado	No	N/A	No official guidelines	Repairs, lease violations, abandonment	30/60 days
Connecticut	Yes	CT-based institution, interest paid annually	1 or 2 months’ rent (age-dependent)	Repairs, lease violations, cleaning costs	15/30 days
Delaware	Yes	DE-based institution, tenant informed of account location	1 month’s rent (1-year lease or longer)	Repairs, lease violations, early termination	20 days
Florida	No	Separate account with FL-based institution, interest paid annually	No official guidelines	Repairs, unpaid rent, lease violations	15/30 days
Georgia	Yes (only if landlord owns >10 units or uses an agent; otherwise not)	GA-based institution, tenant informed of account location	2 month's rent	Repairs, unpaid rent, lease violations	30 days
Hawaii	No	N/A	1 month’s rent	Damages, unpaid rent, lease violations	14 days
Idaho	No	Interest-bearing account advisable, though not required	No official guidelines	Damages, unpaid rent, lease violations	21/30 days
Illinois	No	Interest-bearing accounts for Landlords with 25 units or more, interest paid annually	No official guidelines	Damages, unpaid rent, lease violations	30/45 days
Indiana	No	N/A	No official guidelines	Damages, unpaid rent, lease violations	45 days
Iowa	No	Dedicated account, interest earned during first 5 years goes to the landlord and thereafter to the tenant	2 months’ rent	Damages, unpaid rent, lease violations	30 days
Kansas	No	N/A	1-2 months' rent (depends on furnishing and pets)	Damages, unpaid rent, lease violations	30 days
Kentucky	No	Dedicated account, tenant informed of account location	No official guidelines	Damages, unpaid rent, lease violations	30/60 days
Louisiana	No	N/A	No official guidelines	Damages, unpaid rent, lease violations	30 days
Maine	No	Dedicated account safe from creditors, tenant informed of account location	2 months’ rent	Damages, unpaid rent, lease violations	21/30 days
Maryland	No	Dedicated interest-bearing account in MD-based institution, or insured certificates of deposits or securities issued federally or by MD, or landlord may post a surety bond for the amount of the deposit	2 months’ rent	Damages, unpaid rent, lease violations	45 days
Massachusetts	No	Interest-bearing account, annual interest payment, MA-based financial institution	1 month’s rent	Damages, unpaid rent, lease violations	30 days
Michigan	No	Escrow account, surety or cash bond	1.5 month’s rent	Damages, unpaid rent, lease violations	30 days
Minnesota	No	Interest-bearing account (1% or greater)	No official guidelines	Damages, unpaid rent, lease violations	21 Days
Mississippi	No	N/A	No official guidelines	Damages, unpaid rent, lease violations	45 days
Missouri	No	Dedicated account	2 months’ rent	Damages, unpaid rent, lease violations	30 days
Montana	No	N/A	No official guidelines	Damages, unpaid rent, lease violations	10/30 days
Nebraska	No	N/A Landlord may charge additional pet deposit up to 25% of monthly rent	1 month’s rent	Damages, unpaid rent, lease violations	14 days
Nevada	No	N/A	3 months’ rent (1 month if public housing)	Damages, unpaid rent, lease violations	14/30 days
New Hampshire	No	Dedicated interest-bearing account in NH-based financial institution, tenant informed of account location upon request	1 month’s rent	Damages, unpaid rent, lease violations	20/30 days
New Jersey	No	Money market/interest-bearing account, annual interest payment, specific rates if landlord owns 10+ units	1.5 months' rent	Damages, unpaid rent, lease violations	30 days
New Mexico	No	Interest-bearing account if more than 1 month's rent (greater or equal to passbook interest)	No limit (1 year or more), 1 month’s rent (less than 1 year)	Damages, unpaid rent, lease violations	30 days
New York	No	Interest-bearing account in NY-based financial institution for 6+ units, 1% deposit may be deducted	1 month's rent	Damages, unpaid rent, lease violations	14 days
North Carolina	No	Trust account in NC-based financial institution or bond with NC-licensed company	1.5/2 months’ rent (term-dependent)	Damages, unpaid rent, lease violations	30 days (60 if disputed)
North Dakota	No	Interest-bearing account, interest paid at termination of lease for tenancies of at least 9 months	1/2 months’ rent or $2,500 (greater for pet deposit)	Damages, unpaid rent, lease violations	30 days
Ohio	No	Interest-bearing account if deposit is greater than $50 or 1 month’s rent	No limit	Damages, unpaid rent, lease violations	30 days
Oklahoma	Yes	OK-based financial institution	No official guidelines	Damages, unpaid rent, lease violations	45 days
Oregon	No	N/A	No limit	Damages, unpaid rent, lease violations	31 Days
Pennsylvania	Yes	Escrow account or bond required for deposits over $100	2 months’ rent (first year), 1 month’s rent (second year on)	Damages, unpaid rent, lease violations	30 Days
Rhode Island	No	N/A	1 month’s rent	Damages, unpaid rent, lease violations	20 Days
South Carolina	No	Landlord must notify tenant if amount differs for comparable units	No official guidelines	Damages, unpaid rent, lease violations	30 Days
South Dakota	No	N/A	1 month’s rent (more for potential damage)	Damages, unpaid rent, lease violations	14 Days
Tennessee	No	Dedicated account, tenant informed of account location	No official guidelines	Damages, unpaid rent, lease violations	No official guidelines
Texas	No	N/A	No official guidelines	Damages, unpaid rent, lease violations	30 days (varies)
Utah	No	N/A	No official guidelines	Damages, unpaid rent, lease violations	30 days
Vermont	No	N/A	No official guidelines	Damages, unpaid rent, lease violations	14/60 days
Virginia	No	Itemized records for all security deposits	2 months’ rent	Damages, unpaid rent, lease violations	45 days (30 for itemization)
Washington	No	Dedicated trust account or savings account in a WA or federally regulated institution, or escrow account with WA-based agent	No official guidelines	Damages, unpaid rent, lease violations	21 days
West Virginia	No	N/A	No official guidelines	Damages, unpaid rent, lease violations	60/75 Days
Wisconsin	No	N/A	No official guidelines	Damages, unpaid rent, lease violations	21 Days
Wyoming	No	N/A	No official guidelines	Damages, unpaid rent, lease violations	30/60 Days

Tenant disclosure obligations for opening an escrow account for security deposits

When landlords open an escrow account for security deposits, some state and local laws require disclosing specific details to tenants. Here are some examples of states requiring escrow account disclosures:

New York: Landlords with more than six units must hold security deposits in a separate interest-bearing account and disclose the bank name and interest earned to tenants.
Illinois: Landlords must notify tenants in writing where the deposit is held and pay any interest earned on deposits over $150 to tenants at the end of the lease.
Massachusetts: Requires landlords to provide written notice of the deposit details within 30 days and pay interest annually.

What landlords must disclose about escrow accounts for security deposits

When you open a non-interest or interest-bearing escrow account for renters’ security deposits, you may be required to disclose these details to your tenants. Some states have strict disclosure rules, while others have general guidelines. Failing to disclose properly can lead to penalties, fines, or tenant disputes.

Here’s what landlords may need to disclose, depending on state laws:

Bank name and location: Many states, including Florida and New York, require landlords to provide tenants with the bank name and address where the deposit is stored. Florida also mandates that this information be disclosed within 30 days of receiving the deposit.
Security deposit account type: States like New Jersey and Connecticut require landlords to inform tenants if the account earns interest and how it will be distributed. New Jersey landlords must also pay out interest annually.
Deposit amount and terms: Tenants must be informed of how much was deposited and the conditions under which deductions may occur (e.g., damages, unpaid rent).
Written notice requirements: Disclosure timelines vary by state, but most require written notice at lease signing or within 30 days of receiving the deposit. In Maine, landlords must provide bank and account details only if a tenant requests them.
Annual interest: In states like Washington, D.C., landlords must send annual statements outlining the escrow balance and interest accrued.

Security deposit returns: Landlords must send a security deposit return letter detailing the amount and timing of returns within the state-mandated notice period (e.g., 14 days in South Dakota and 30 days in Georgia). If any of the deposit is withheld, these details must be provided in a security deposit disposition form to the tenant.

Here’s how to communicate these requirements to tenants:

Include disclosures in the lease: Add a “Security Deposit” clause stating the deposit amount, bank name, account type, and how interest (if applicable) is handled. This ensures tenants receive all required information upfront in a legally binding document.
Provide a separate security deposit receipt: List the deposit amount, bank details, and account type in a dedicated security deposit receipt. Some states, like New York, require landlords to provide a signed receipt confirming where the deposit is held.
Use simple, direct language: Avoid legal jargon. Instead of “Funds to be held in a segregated account pursuant to XYZ statute,” say, “Your deposit is in a separate escrow account at [Bank Name] for security deposits only.”
Notify tenants of any account changes: If you switch banks or transfer ownership, some states require updated disclosures within 30 days. A simple written notice keeps everything clear and avoids disputes.
Keep records of all disclosures: Save copies of lease agreements, receipts, and written notices. Consider having tenants sign an acknowledgment or send a confirmation email for documentation.

Step-by-step guide to setting up an escrow account for security deposits

Setting up an escrow account for rent ensures security deposits are managed correctly. Here’s a general overview of how to open an escrow account for landlords:

Step 1: Check state and local laws

Before opening an escrow account, research state and local regulations to determine:

Whether landlords are required to hold deposits in escrow.
If the account must be interest-bearing, and how interest should be handled.
Disclosure obligations, such as informing tenants about the bank details.

Example:

Pennsylvania requires landlords to use an escrow account for renters if deposits are over $100, and provide a written notice of the bank and deposit location.
California does not require landlords to place security deposits in an escrow account.
Oklahoma mandates that deposits be held in an escrow account with a federally insured banking institution based in the state.

Step 2: Choose a bank or financial institution

Select a bank that meets your state’s criteria for landlord escrow accounts. Some states, like Delaware, require landlords to use a federally insured financial institution. Look for an account with no monthly fees, easy access, and clear record-keeping.

Step 3: Provide required documentation

Banks typically require the following to open an escrow account:

Personal or business identification: Government-issued ID and EIN (if the deposit is held under an LLC)
Property ownership documentation: Deed or property management agreement.
Lease agreement: Proof that the account will be used for tenant security deposits.

Some banks may also have specific escrow account forms for landlords, so check in advance.

Step 4: Fund the escrow account

Once the account is open:

Deposit the tenant’s security deposit immediately upon collection.
Track which deposits belong to each tenant to ensure accurate records.
Confirm funds are held separately from operational or rent payment accounts.

Tip: Consider your bank’s fees for additional accounts and the time required to manually track deposits. With Baselane, you can open multiple security deposit accounts for free and auto-tag transactions to a specific property or unit.

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Step 5: Notify tenants about the escrow account

In states requiring disclosures, landlords must inform tenants in writing about:

Bank name and location holding the deposit.
Interest details (if applicable) including how and when it will be disbursed.
Conditions for return and deductions based on lease agreements.

Tip: Include these details in the lease agreement and provide a written security deposit receipt to ensure compliance.

Step 6: Maintain the account and follow compliance rules

Monitor the escrow account and follow state interest payment rules. Some states require annual interest payments:

Pay interest (if applicable): Some states require landlords to pay interest to tenants annually or upon lease termination.
Track deposits and deductions: Keep a record for each tenant’s security deposit and deductions.
Return deposits on time: Follow state timelines for refunding full or partial deposits after lease termination.

Example of escrow account interest rules:

Maryland mandates landlords pay interest on deposits over $50, either 1.5% or the U.S. Treasury curve rate (whichever is greater), accruing after six months and refunded at move-out.
Pennsylvania requires landlords to pay annual interest on deposits over $100 held for over two years, less a 1% administrative fee.

Example of deposit return timelines:

California: Return within 21 days of tenant move-out.
New York: Must be returned within 14 days.
Florida: Requires a written notice within 30 days if deductions apply.

Tip: Set calendar reminders for security deposit return deadlines to avoid legal penalties.

Step 7: Close or transfer the escrow account if needed

If you sell the property or change banks:

Notify tenants about any change in the escrow account holder.
Transfer funds to the new landlord or management company while maintaining proper documentation.
Close the account properly after returning all security deposits to tenants.

Tip: Always provide written confirmation of fund transfers to ensure transparency.

Penalties for non-compliance

Each state has different consequences for landlords who mismanage security deposits or fail to properly disclose escrow details.

Here’s what non-compliance could cost you:

Forfeiture of security deposit: In Delaware, must place tenant security deposits in a federally insured escrow account within the state. Non-compliance can result in the landlord forfeiting the right to retain security deposit, requiring its return to the tenant.
Triple damages and legal fees: In Maryland, if a landlord fails to return any part of the deposit (without reasonable cause) within 45 days of the lease ending, the tenant may be entitled to recover up to three times the withheld amount, in addition to reasonable attorney’s fees.
Fines for improper handling: In New York, landlords must keep security deposits in interest-bearing accounts at a state bank and provide tenants with the bank’s name and address. Non-compliance can lead to financial penalties and potential legal action.
Legal consequences: In Illinois, landlords must return security deposits within 45 days (30 days for deductions) after the tenant vacates the premises. Failing to follow these rules could result in the landlord owing up to twice the security deposit amount plus court and attorney fees.

How to open a security deposit account with Baselane

Baselane offers banking solutions for landlords to keep security deposits separate and earn up to 3.35% APY2.

In this section, we’ll guide you on how to open a security deposit account in three simple steps.

1. Open Baselane banking account

Create a free account using your email address. It only takes a few minutes and won’t impact your credit score.

You’ll be asked to provide documents for identity verification purposes. For a business bank account, you must be officially registered in the U.S. and provide additional details like your federal EIN.

2. Create virtual accounts

Once your profile is set up, you can add multiple tenant security deposit accounts and auto-tag all transactions to a specific property or unit. Depending on state regulations, you can hold security deposits in a non-interest (Checking) or interest-bearing (Savings) account.

There’s no limit on the number of security deposit accounts you can have, and you don’t have to worry about account fees or minimum balances.

3. Collect security deposits

Collect security deposits from tenants via bank transfers (ACH payments), mobile check deposits, or wire transfers. Add security deposit funds to the virtual account you set up for each tenant or rental property.

You can also set up separate accounts to collect rent online. Baselane’s rent collection service makes it easy to automate payments, late fees, and reminders to help tenants stay on track and get paid on time.

Easily collect and return security deposits with Baselane

Even in states where escrow accounts aren’t required, having a dedicated account for security deposits can save you time later on. Having a separate bank account for security deposits will help you avoid sifting through receipts and statements for the original deposit amount and any deductions you made when it’s time to return a deposit.

Baselane makes it easy to set up separate accounts and start collecting security deposits and rent payments online in a matter of minutes. Plus, you can screen tenants, e-sign leases, and automate bookkeeping and tax packages (plus more) all in the same place for complete control over your cash flow without all the extra admin.

Ready to get started? Open a free security deposit account today.

Disclaimer: This is not legal advice and not meant to be used as legal advice. Consult a lawyer or legal professional for legal advice.

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