It’s true, security deposit escrow accounts’ NYC guidelines make it mandatory for property managers holding funds for tenants.
And for buildings with six or more units, that account needs to be interest-bearing; no exceptions.
Now, for buildings with fewer than six units, a separate account is still required, mind you, but the interest-bearing requirement doesn’t apply. Either way, the deposit cannot sit in your operating account.
Most property managers know they need an account, but they might now know what compliance looks like. The difference between having an account and having the right account is where the exposure lives. It’s a distinction that has cost property managers in New York significantly, and its a crucial component of setting up healthy and scalable security deposit operations.
This guide covers what New York state requires, how to set up a compliant account, what the interest obligation actually looks like, and what happens when a landlord gets it wrong.
Security Desposit Escrow Account NYC Guidelines
New York’s security deposit rules for account management are governed by the General Obligations Law §7-103. The requirements depend on building size.
Buildings with six or more units: The deposit must be held in a separate, interest-bearing bank account at a New York state bank. The account cannot be commingled with the landlord’s operating or personal funds. The landlord must notify the tenant in writing of the bank name, address, and account number within 30 days of receiving the deposit.
Buildings with fewer than six units: A separate account is still required. The interest-bearing requirement does not apply, but the funds cannot be commingled with operating funds and must be held in a way that keeps the tenant’s money identifiable and protected.
The 30-day notification requirement: Within 30 days of receiving the security deposit, the landlord must provide the tenant with written notice containing the name and address of the bank where the deposit is held and the account number. This is one of the most commonly missed requirements in New York. It’s a statutory obligation.
When the building is sold: If the rental property changes hands, the landlord must transfer all security deposits to the new owner. Purchasers of rent-stabilized buildings are directly responsible to tenants for the return of security deposits even if they never received the security deposits from the former landlord. The responsibility exists whether or not the former landlord completed the transfer. The landlord must also notify each tenant of the new owner’s name and address.
Security Deposits and Interest: What the Landlord Owes
For buildings with six or more units, New York law requires that the security deposit be held in an interest-bearing account. The interest earned on the rent security deposit belongs to the tenant. The landlord does not keep the interest. There is one exception.
The landlord may retain up to 1% of the deposit amount annually as an administrative fee.
The math is pretty simple.
On a $3,900 security deposit (one month’s rent at the current NYC median), the maximum administrative fee the landlord may keep is $39 per year. Everything the account earns beyond that belongs to the tenant.
Interest must be paid or credited to the tenant annually, or the landlord can hold the accumulated interest and pay it at move-out; it’s up to the property manager, they just need to make sure it’s communicated to the tenants. In the end, any additional interest has to be paid back in full. Failing to pay isn’t a minor oversight. It’s a statutory violation under GOL §7-105 on every affected deposit.
For NYC property managers managing buildings with six or more units, that’s not just a compliance miss. Every tenant who didn’t receive their interest is a potential violation.
FBO Accounts and Commingling: The Setup Most PMs Get Wrong
An FBO (For Benefit Of) account is a bank account held in the landlord’s name but titled for the benefit of the tenants. If the landlord goes into financial distress or bankruptcy, funds in an FBO account are protected from creditors because they legally belong to the tenants. Most major New York banks offer FBO or trust account structures. The account should be titled something like “[Owner Name] FBO Tenants.”
Here are the three ways this goes wrong in practice.
Wrong Account Title
A standard operating account or personal bank account titled in the landlord’s name alone does not satisfy the FBO requirement, even if the funds are kept separate. The title is the structure. Without it, the tenant protections the account is supposed to provide don’t exist. A landlord can have a dedicated account with zero commingling and still be in violation if the account isn’t titled correctly.
Commingling
Commingling is the most common escrow violation and it’s independent of everything else. A landlord who mixes deposit funds with rent collections, maintenance costs, or personal funds has broken the law from the moment the funds were mixed. It doesn’t matter if the deposit is eventually returned correctly. It doesn’t matter if interest is paid on time. The commingling itself is the violation.
State real estate commissions conduct random escrow audits. Correct handling elsewhere does not cure a commingling violation.
Wrong Account Type
For buildings with six or more units, the account must be interest-bearing. Opening a compliant FBO account that doesn’t earn interest is still a violation. Having the right title and the right structure isn’t enough if the account type itself doesn’t meet the statutory requirement.
The Real Cost of Getting This Wrong
These aren’t abstract compliance risks. A large class action lawsuit filed last year was directly caused by exactly these infractions.
Opening a Compliant Security Deposit Account: Step by Step
- Choose a New York state bank that offers FBO or trust accounts. Chase, Bank of America, and most major regional banks in New York offer tenant security deposit account structures. Call ahead to confirm the account type before opening.
- Title the account correctly. The account should reflect FBO status. Something like “[Your Company Name] FBO Tenants” or “[Building Name] Security Deposit Account.”
- Ensure the account is interest-bearing. For buildings with six or more units, this is a statutory requirement. Confirm with the bank before opening that the account earns interest.
- Notify each tenant within 30 days. Provide written notice with the bank name, address, and account number. Keep a record of when and how the notice was delivered.
- Maintain individual tenant ledgers. Each tenant’s deposit, interest accrual, and any administrative fee should be tracked separately within your records, even if all deposits are held in a single pooled account. The ledger is what you produce during an audit.
- Document the account details in the lease. Include the bank name, account type, and interest arrangement in the lease agreement. This creates a paper trail from day one.
How to Avoid Small Claims Court and AG Complaints
Understanding what a tenant may do when a deposit isn’t returned correctly is the most direct way to understand what your process needs to prevent. The documentation, the deadlines, and the account structure are not bureaucratic requirements. They are the specific things a tenant’s attorney or a small claims judge will ask for.
When a landlord fails to return the security deposit within 14 days, fails to provide an itemized list of deductions, or withholds more than the actual damage warrants, the tenant has several options. A property manager who knows what those options are builds a process that closes every opening before it forms.
Small claims court is the most common route for security deposit disputes in New York. In New York City, small claims court handles sums up to $10,000. The process is accessible to non-lawyers. A tenant can file, present their case to a judge, and if a judgment is awarded, collect against the landlord’s assets. The bar is low and the timeline is short. Missing the 14-day deadline is often all it takes.
A complaint to the New York state attorney general is available to tenants as well. The attorney general cannot go to court on behalf of an individual tenant, but the office investigates patterns of violations across portfolios. Since 2023, nearly 5,000 renters have filed security deposit complaints with the AG and the AG has recovered over $2.1 million. Being named in an AG investigation is not just a legal problem. It’s an operational and reputational one.
Civil court is available for larger amounts or cases involving willful violations. Courts may award punitive damages on top of the deposit amount when a landlord willfully withholds funds. In Karole v. West End Ave, a court awarded 2x punitive damages. The tenant received twice the withheld amount, not just the deposit.
The pattern that creates liability is straightforward: missed deadline, missing documentation, deductions that can’t be supported. A systematic process that produces an itemized statement, a photograph record, and a return within 14 days removes all three triggers before the tenant has anything to file.
Deductions: What You Can Keep and What You Owe Back
Under GOL §7-108, the rules are straightforward. Here’s how it breaks down.
What You Can Keep
- Unpaid rent
- Damage beyond normal wear and tear
- Unpaid utility charges payable to the landlord under the lease
- Storage charges where applicable
What You Cannot Touch
Normal wear and tear is not yours to keep. Paint fading, minor wall scuffs, carpet worn from regular use: these are the cost of renting, not the tenant’s liability. The line between the tenant damaged the apartment and the tenant lived in the apartment is where most disputes start.
Proof That Holds Up
Every deduction must be itemized. Within 14 days of move-out, the tenant gets an itemized list and whatever portion of the deposit is being returned. Both. On time.
Miss the 14-day window and you forfeit the right to retain anything, regardless of whether the deductions were legitimate.
The Paper Trail You Need (For Audits)
- Repair receipts
- Contractor invoices
- Photographs of the apartment before and after the tenancy
A deduction without documentation is a deduction you can’t defend.
Does Yardi Manage the Escrow Account?
Yardi records the security deposit as a liability on the tenant ledger and reflects the return when it’s processed. What it doesn’t do: open the account, verify the FBO structure, track interest accrual on individual deposits, flag the 30-day notification obligation, or monitor the 14-day return deadline.
The account exists in your bank. Yardi reflects it.
For property managers using Yardi who want the compliance layer handled automatically, Rentable covers interest tracking, deadline monitoring, account documentation, and post move-out escheatment tracking. Rentable integrates natively with Yardi and covers the full deposit lifecycle without changing your existing workflow.
Frequently Asked Questions
Are NYC landlords required to hold security deposits in escrow?
Yes, for all residential rentals. Buildings with six or more units must hold deposits in a separate, interest-bearing bank account at a New York state bank titled FBO the tenants. Buildings with fewer than six units must hold deposits in a separate account but are not required to use an interest-bearing account. In both cases, commingling with operating funds is prohibited.
What are the security deposits and interest rules in New York?
For buildings with six or more units, security deposits must be held in an interest-bearing account. The interest earned belongs to the tenant. The landlord may retain up to 1% of the deposit amount annually as an administrative fee. Interest must be paid or credited to the tenant annually or at move-out. Failure to comply is a statutory violation on every affected deposit.
What can a tenant do if a landlord misses the 14-day deadline in NYC?
A tenant may go to small claims court to recover the full deposit plus damages. In New York City, small claims court handles disputes up to $10,000 without requiring an attorney. Tenants may also file a complaint with the New York state attorney general’s office. Courts may award punitive damages for willful violations. The most effective way to avoid this is a documented process that produces an itemized statement and a return within 14 days of move-out, every time.
What happens if a landlord misses the deposit return deadline in NYC?
Missing the 14-day return deadline forfeits the landlord’s right to retain any portion of the deposit, regardless of whether the underlying deductions were legitimate. The tenant may file in small claims court to recover the full amount. Courts may also award punitive damages for willful violations. The deadline applies to both the return of funds and the delivery of the itemized statement. Both must happen within 14 days.
Does Yardi handle the escrow account for security deposits?
Yardi records the deposit as a liability and reflects the return. It doesn’t open the account, verify FBO structure, track interest obligations, or flag return deadlines. The escrow account lives in your bank. Compliance is the property manager’s responsibility.
Last updated: March 2026. This guide reflects New York General Obligations Law as amended by S952B (effective November 15, 2025). Statutes referenced: GOL §7-103 (escrow account requirements), GOL §7-105 (interest obligations), GOL §7-108 (allowable deductions). It is intended as operational guidance for property managers and does not constitute legal advice. Consult a qualified attorney for advice specific to your situation.
