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 escrow account for security deposits (some don’t require interest).
- 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.
Landlord Guide: Rental Security Deposits
Get tips and state rules for collecting and managing 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 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.
Benefits of Opening an Escrow Account for Security Deposits
Financial Protection
An escrow account 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, 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 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
An escrow 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.
Are Landlords Required to Hold Security Deposits in an Escrow Account?
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 | ❌ | N/A | 1 month’s rent | Repairs, unpaid rent | 60 days |
| Alaska | ❌ | Trust account with bank, savings/loan association, or licensed escrow agent and must provide tenant with conditions of refund and potential deductions | 2 months’ rent | Repairs, damages | 14/30 days |
| Arizona | ❌ | N/A | 1.5 months’ rent | Repairs, lease violations | 14 days |
| Arkansas | ❌ | N/A | 2 months’ rent (if certain conditions are met) | Repairs, lease violations, cleaning costs | 60 days |
| California | ❌ | N/A | 2 months’ rent | Repairs, lease violations, cleaning costs | 21 days |
| Colorado | ❌ | N/A | No official guidelines | Repairs, lease violations, abandonment | 30/60 days |
| Connecticut | ✔ | CT-based institution, interest paid annually | 1 or 2 months’ rent (age-dependent) | Repairs, lease violations, cleaning costs | 15/30 days |
| Delaware | ✔ | 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 | ❌ | Separate account with FL-based institution, interest paid annually | No official guidelines | Repairs, unpaid rent, lease violations | 15/30 days |
| Georgia | ✔ | GA-based institution, tenant informed of account location | 1 month's rent | Repairs, unpaid rent, lease violations | 30 days |
| Hawaii | ❌ | N/A | 1 month’s rent | Damages, unpaid rent, lease violations | 14 days |
| Idaho | ❌ | Interest-bearing account advisable (not required) | No official guidelines | Damages, unpaid rent, lease violations | 21 days |
| Illinois | ❌ | Interest-bearing account in IL-based institution, interest paid annually (if over 25 units) | No official guidelines | Damages, unpaid rent, lease violations | 30/45 days |
| Indiana | ❌ | N/A | No official guidelines | Damages, unpaid rent, lease violations | 45 days |
| Iowa | ❌ | Dedicated account, interest earned in first 5 years goes to landlord then to tenant | 2 months’ rent | Damages, unpaid rent, lease violations | 30 days |
| Kansas | ❌ | N/A | 1 or 2 months' rent (depends on furnishing and pets) | Damages, unpaid rent, lease violations | 30/60 days |
| Kentucky | ❌ | Dedicated account, tenant informed of account location | No official guidelines | Damages, unpaid rent, lease violations | 30/60 days |
| Louisiana | ❌ | N/A | No official guidelines | Damages, unpaid rent, lease violations | 30 days |
| Maine | ❌ | Dedicated account safe from creditors, tenant informed of account location | 2 months’ rent | Damages, unpaid rent, lease violations | 21/30 days |
| Maryland | ❌ | Dedicated interest-bearing account in MD-based institution, or federally-insured certificates of deposits or securities, or surety bond | 2 months’ rent | Damages, unpaid rent, lease violations | 45 days |
| Massachusetts | ❌ | Interest-bearing account, annual interest payment, MA-based financial institution | 1 month’s rent | Damages, unpaid rent, lease violations | 30 days |
| Michigan | ✔ | Escrow account, surety or cash bond | 1.5 month’s rent | Damages, unpaid rent, lease violations | 30 days |
| Minnesota | ❌ | Interest-bearing account (1% or greater) | No official guidelines | Damages, unpaid rent, lease violations | 21 Days |
| Mississippi | ❌ | N/A | No official guidelines | Damages, unpaid rent, lease violations | 45 days |
| Missouri | ❌ | Dedicated account | 2 months’ rent | Damages, unpaid rent, lease violations | 30 days |
| Montana | ❌ | N/A | No official guidelines | Damages, unpaid rent, lease violations | 10/30 days |
| Nebraska | ❌ | N/A | 1 months’ rent | Damages, unpaid rent, lease violations | 14 days |
| Nevada | ❌ | N/A | 3 months’ rent (1 month if public housing) | Damages, unpaid rent, lease violations | 14 days |
| New Hampshire | ❌ | Dedicated 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 | ❌ | 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 | ❌ | 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 | ❌ | Interest-bearing account in NY-based financial institution for 6+ units, landlord may deduct 1% | 1 month's rent | Damages, unpaid rent, lease violations | 14 days |
| North Carolina | ❌ | 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 | ❌ | Interest paid at lease termination for tenancies over 9 months | 1/2 months’ rent or $2,500 (greater for pet deposit) | Damages, unpaid rent, lease violations | 30 days |
| Ohio | ❌ | Interest-bearing account if deposit is greater than $50 or 1 month’s rent | No limit | Damages, unpaid rent, lease violations | 30 days |
| Oklahoma | ✔ | OK-based financial institution | No official guidelines | Damages, unpaid rent, lease violations | 45 days |
| Oregon | ❌ | N/A | No limit | Damages, unpaid rent, lease violations | 31 Days |
| Pennsylvania | ✔ | 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 | ❌ | N/A | 1 month’s rent | Damages, unpaid rent, lease violations | 20 Days |
| South Carolina | ❌ | Landlord must notify tenant if amount differs for comparable units | No official guidelines | Damages, unpaid rent, lease violations | 30 Days |
| South Dakota | ❌ | N/A | 1 month’s rent (more for potential damage) | Damages, unpaid rent, lease violations | 14 Days |
| Tennessee | ❌ | Dedicated account, tenant informed of account location | No official guidelines | Damages, unpaid rent, lease violations | No official guidelines |
| Texas | ❌ | N/A | No official guidelines | Damages, unpaid rent, lease violations | 30 days (varies) |
| Utah | ❌ | N/A | No official guidelines | Damages, unpaid rent, lease violations | 30 days |
| Vermont | ❌ | N/A | No official guidelines | Damages, unpaid rent, lease violations | 14/60 days |
| Virginia | ❌ | Itemized records for all security deposits | 2 months’ rent | Damages, unpaid rent, lease violations | 45 days (30 for itemization) |
| Washington | ❌ | Dedicated account WA-based or federal institution, or escrow account with WA agent | No official guidelines | Damages, unpaid rent, lease violations | 21 days |
| West Virginia | ❌ | N/A | No official guidelines | Damages, unpaid rent, lease violations | 60/75 Days |
| Wisconsin | ❌ | N/A | No official guidelines | Damages, unpaid rent, lease violations | 21 Days |
| Wyoming | ❌ | N/A | No official guidelines | Damages, unpaid rent, lease violations | 30/60 Days |
How to Open a Security Deposit Account with Baselane?
Thousands of property owners and landlords use Baselane Banking to keep security deposit funds separate and earn up to 3.56% 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 an account using your email address. It’s completely free, and the process only takes a few minutes.
Opening a Baselane banking account doesn’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 US 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 per property. 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
Easily 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. Automated payments, late fees, and reminders help tenants stay on track so you get paid on time.
Keep your money organized
Open unlimited accounts for properties and security deposits with no monthly fees.
Final Thoughts
Even in states where escrow accounts aren’t required, having a dedicated account for security deposits can save you time later on. Separate security deposit accounts 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.
For an easy way to collect and return security deposits, check out Baselane. It’s an all-in-one property management platform trusted by 40,000+ landlords and investors for collecting security deposits and rent payments online, automating rental property accounting and bookkeeping, and more.
Ready to see how our free security deposit accounts work? Book a demo with Baselane today!
DISCLAIMER: THIS IS NOT LEGAL ADVICE AND IS NOT MEANT TO BE USED AS LEGAL ADVICE. CONSULT A LOCAL LAWYER OR LEGAL PROFESSIONAL FOR LEGAL ADVICE.
Banking built for real estate
- Multiple accounts per property
- No monthly fees or minimum balances
- Earn up to 3.56% APY2 and 1% cash back3
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