Where Is Your Tenant’s Security Deposit Right Now? A 6-Step Setup for Out-of-State Landlords

Most landlords think about the security deposit at move-in and move-out. For an out-of-state owner, the risky part is often the 12 months in between. In some states, where you keep that money is regulated from day one, and a mistake can cost you the right to keep any of it. Here is what to know, plus a six-step setup you can finish in an afternoon.

The misconception: “It’s my money until they move out”

In several states the deposit legally stays the tenant’s money while you hold it. New York’s General Obligations Law says deposit money “shall continue to be the money of the person making such deposit,” is held in trust, and “shall not be mingled with the personal moneys” of the landlord (N.Y. GOL § 7-103). Florida uses similar language: no commingling, and no “use of such moneys until such moneys are actually due the landlord” (Fla. Stat. 83.49(1)).

So paying a water-heater bill from the account holding the deposit can be a violation there, even if you refill it later.

What four states actually require (facts)

• Florida: Three options: (a) a separate non-interest-bearing account at a Florida financial institution, (b) a separate interest-bearing Florida account, where the tenant gets at least 75% of the interest or 5% simple interest, or (c) a surety bond plus 5% simple interest to the tenant. Owed interest is paid or credited at least once a year. A required written notice of where the deposit is held applies only to landlords with five or more units, but the account rules have no small-landlord exception. A renewal also counts as a new rental agreement, and the deposit carried into it is treated as a new deposit (83.49(1), (2), (6), (9)).
• Massachusetts: A separate, interest-bearing account at a bank in Massachusetts. Within 30 days the tenant gets a receipt showing the bank, amount and account number. After one year, the tenant is owed 5% interest or the bank’s lower rate. If you don’t deposit the money correctly, you lose the right to keep any part of it. Some failures (for example, not returning it on time) trigger damages of three times the deposit (M.G.L. c. 186 § 15B(3), (6), (7)).
• New Jersey: The deposit goes into an interest-bearing account at an insured bank in New Jersey. The interest belongs to the tenant, and the landlord can no longer keep any of it as an administrative fee. Within 30 days the tenant gets a written notice naming the bank, account type, rate and amount. If you skip this, the tenant can tell you in writing to apply the deposit plus 7% a year to rent. The deposit cap is 1.5 months’ rent. (NJ DCA Security Deposit Bulletin, rev. July 2025).
• New York: No commingling, and the tenant must get written notice of the bank (it must be in New York). An interest-bearing account is required for buildings with six or more units. If you use one anyway, you may keep 1% a year as an administrative fee, and the rest of the interest belongs to the tenant (GOL § 7-103(2), (2-a)).

Some states are much lighter. Texas has no separate-account statute, but it requires a refund within 30 days after the tenant surrenders the unit. (Tex. Prop. Code 92.103). California’s main rule is the amount. Since July 1, 2024, most landlords may take at most one month’s rent as security. A natural person, or an LLC whose members are all natural persons, that owns no more than two rental properties with no more than four units in total may take two months, except from service members (Cal. Civ. Code 1950.5(c)).

What this means for a remote owner (interpretation, not fact)

The property’s state sets the rules, not yours. An Ohio owner with a New Jersey duplex needs a New Jersey bank account; Florida and Massachusetts also require in-state banks, so your hometown credit union may not qualify.

The money involved is small. The penalties are not. Take an illustrative $1,800 deposit. At 5% simple interest, a Florida surety-bond landlord owes the tenant $90 a year. A mistake in Massachusetts can mean losing the right to keep any of the $1,800, and some violations carry damages of three times the deposit, or $5,400. The account costs almost nothing compared with that.

If a property manager holds it, check it. Ask for the bank name and confirm the deposit shows on your owner statement as a liability, not income. If you fire the manager, moving the deposit is part of the exit. Our monthly PM audit covers how to check trust balances.

Taxes: The IRS says a deposit you plan to return is not income when you receive it. It becomes income if you keep it or if it is applied as the last month’s rent (IRS Pub. 527).

One more trap: “Just use the deposit as last month’s rent”

In Texas, a tenant who withholds last month’s rent because “you have the deposit” is presumed to act in bad faith and can owe three times the rent withheld plus attorney’s fees (Tex. Prop. Code 92.108). Wherever you are, put any agreement in writing and still do the move-out inspection before money changes hands.

Six-step deposit setup checklist

1. Look up your property’s state rule on the official statute or housing-agency page: separate account, interest, in-state bank, notice deadline, and cap on the amount.
2. Open one dedicated deposit account per state, at a bank in that state if required. Never pay bills from it.
3. Send the written notice (bank name, address, amount, whether interest is owed) within the state deadline. Keep a copy and a delivery receipt.
4. Calendar the anniversary. If interest is owed, pay or credit it once a year and keep the statement.
5. Recheck at renewal. If you raise the deposit, stay under the cap. In Florida, the deposit carried into a renewal counts as a new deposit.
6. Plan the handoff. If you sell or change managers, the deposit and its records must follow the tenant. See our tenant-in-place guide for how that transfer works, and our self-management guide for the bigger picture.

This article is general education for rental owners, not legal, tax, financial or investment advice. Security-deposit rules vary by state and city and change over time. Check current law for your property’s location or consult a qualified professional before acting. Dollar figures are illustrative examples, not quotes. The featured image is AI-generated.