How to Open an Escrow Account for Tenant Security Deposits (2026 Landlord Guide)
Updated: 1 day ago
Updated October 2026. General information, not legal advice. Statutes are quoted from official state legislature websites.
Short answer: To open an escrow account for security deposits, check your state's rules first (some require a separate account at an in-state or federally insured bank, some require interest), then ask your bank for a separate business deposit account titled as a security-deposit or trust account, fund it only with tenant deposits, and keep a ledger that ties each tenant's deposit to the account balance. Several states, including Massachusetts, Maryland, Delaware, Florida, Iowa and North Dakota, set specific account rules in statute; others are silent but still bar you from treating the deposit as your own money.
What Is a Security Deposit Escrow Account?
It's a bank account that holds tenants' security deposits separately from your operating money. Statutes use different names (escrow account, trust account, separate account, security deposit account), but the idea is the same: the money stays identifiable as the tenants' until you lawfully return it or apply it to unpaid rent or damage.
The words matter less than the rules. Check whether your state requires:
a separate account (no commingling with your own funds);
an account at a bank located in the state or federally insured;
an interest-bearing account, and whether the interest belongs to the tenant;
a written notice to the tenant naming the bank or account.
State Examples (Official Statutes)
State | Account rule (summary) | Interest | Statute |
|---|---|---|---|
Massachusetts | Separate, interest-bearing account in a bank located in Massachusetts; receipt naming the bank and account number within 30 days | Tenant gets 5% per year or the lesser amount the bank paid, on deposits held a year or more | |
Maryland | Accounts in branches of financial institutions located in Maryland, devoted only to security deposits and bearing interest; deposit within 30 days | Interest required (see statute for rate rules) | |
Delaware | Escrow bank account in a federally insured bank with a Delaware office that accepts deposits; designated as a security deposits account | See statute | |
Florida | Options include a separate non-interest-bearing or interest-bearing account in a Florida financial institution (or posting a surety bond); no commingling | If interest-bearing, the tenant receives at least 75% of the annualized average interest rate or 5% simple interest, at the landlord's election | |
Iowa | Held in a bank, savings and loan or credit union insured by a federal agency; not commingled; may be a common trust account | Interest during the first five years belongs to the landlord | |
North Dakota | Federally insured interest-bearing savings or checking account for the benefit of the tenant | Deposit and accrued interest paid to the tenant at the end of the lease, subject to the statute |
Other states have their own rules, and some cities (for example Chicago) add interest or account requirements. Check your state's statute before opening the account; our state landlord law pages are a good starting point.
Step-by-Step: Opening the Account
1. Confirm your state and local rules
Write down the answers to the four questions above (separate, location or insurance, interest, notice). Rules can differ by city and by property type.
2. Choose a bank that fits the rule
If the statute requires an in-state or federally insured institution, confirm that before you apply. Ask the bank whether it offers accounts titled as security-deposit or trust accounts for landlords, and what interest it pays. In interest-paying states you'll need that rate.
3. Gather documents
Banks usually ask for identification, your business formation documents and EIN (if you own through an LLC or corporation), and sometimes a list of the properties. Ask the bank for its exact checklist.
4. Title the account clearly
Use a title that shows the funds belong to tenants (for example "[Your LLC] – Tenant Security Deposit Account"). Some statutes require the account to be designated as a security deposit account.
5. Deposit promptly and notify tenants where required
Some statutes set deadlines, such as Maryland's 30 days to deposit and Massachusetts' 30 days to give a receipt naming the bank. Put the deposit in the account and send any required notice on time.
6. Keep a deposit ledger
Record each tenant, unit, amount, date received, bank and any interest. Reconcile the ledger to the bank balance every month. Massachusetts, for example, requires landlords to keep deposit records and make them available to tenants.
Summary: Escrow Account Checklist
Step | What to do | Why it matters |
|---|---|---|
Rules | Check separate-account, bank-location, interest and notice rules | Some violations mean forfeiting the right to keep any deductions |
Bank | Confirm the institution qualifies | Location or insurance requirements |
Title | Name the account as a tenant deposit or trust account | Shows the funds aren't yours |
Deposit | Move funds in on time | Statutory deadlines |
Notice | Tell tenants the bank or account details where required | Statutory receipts |
Ledger | Reconcile monthly, per tenant | Fast, accurate refunds at move-out |
Common Mistakes
Commingling, such as paying a repair bill from the deposit account before the tenancy ends.
Missing notices in states that require a receipt naming the bank.
Ignoring interest in states that require it to be paid or credited.
Late returns. Return deadlines vary by state; see our guide to returning security deposits.
Mixing up deposit types. A holding deposit isn't always treated like a security deposit; see holding deposit vs. tenancy deposit.
Track Deposits Without Spreadsheets
A separate account only helps if your books show whose money it is. Hoozzee's property management accounting is a double-entry system with bank account integration and rent and expense tracking, so your deposit ledger and bank balance live in one place. Start on the free plan; paid plans start at €45/month. See pricing.
Frequently Asked Questions
Do all states require an escrow account for security deposits?
No. Some states require a separate or escrow account by statute (Massachusetts, Maryland, Delaware, Florida, Iowa and North Dakota, among others) and others don't specify one. Even where it isn't required, keeping deposits separate makes refunds and disputes far easier.
Can I keep the interest on the escrow account?
It depends on the state. Iowa lets the landlord keep interest earned during the first five years of a tenancy, while Massachusetts and North Dakota require interest to go to the tenant.
Can one account hold deposits for several properties?
Often yes, if your ledger shows each tenant's share. Iowa's statute expressly allows a common trust account. Check your state's wording.
Can I use deposit money for repairs during the tenancy?
Generally no. Deductions are made at the end of the tenancy and itemized according to state law.
What happens if I don't use a required separate account?
Penalties vary by state. In Massachusetts, failing to deposit as required entitles the tenant to the immediate return of the deposit, and the landlord forfeits the right to keep any of it.
Sources: M.G.L. c. 186 § 15B; Md. Code, Real Prop. § 8-203; 25 Del. C. § 5514; Fla. Stat. § 83.49; Iowa Code § 562A.12; N.D. Cent. Code § 47-16-07.1. Updated October 2026.
