The Property Operations and Compliance Guide to Security Deposits: New York

Security deposit compliance in New York is more demanding than most property managers realize, and the Attorney General’s office has the complaint data to prove it.

Since 2023, nearly 5,000 New York renters filed security deposit complaints, and the AG has recovered over $2.1 million from landlords and managers who got it wrong.

Here’s what the law requires you to do:

• Collect no more than one month’s rent as a security deposit
• Notify the tenant in writing of the bank name, address, and account number within 30 days of receiving the deposit
• Hold funds in a compliant, interest-bearing escrow account for buildings with six or more units
• Pay or credit interest earned on the deposit to the tenant annually, or at move-out. You may retain up to 1% of the deposit amount as an administrative fee.
• Return the deposit within 14 days of move-out with a written itemized statement
• Report unclaimed deposits to the state after a three-year dormancy period under New York’s Abandoned Property Law

That’s the statutory checklist. This guide covers what each of those obligations actually looks like in practice, and where most property managers get exposed.

In November 2025, Governor Hochul signed S952B, extending full HSTPA deposit protections to rent-stabilized units, covering almost one million apartments statewide that were previously operating under a different set of rules. The compliance surface just got bigger.

What New York Law Requires: An Operational Checklist for Property Managers

New York’s security deposit laws are governed primarily by the General Obligations Law (GOL) §§7-103 through 7-108, amended significantly by the Housing Stability and Tenant Protection Act of 2019 and updated again by S952B in November 2025. For a full statutory breakdown of New York security deposit law, see our complete guide to New York security deposit laws. This guide focuses on what those rules mean operationally.

The most important rule in NYC is that landlords must transfer all security deposits to a separate account, every time.

Move-In

1. Collect no more than one month’s rent as a security deposit. No exceptions for unit type, building size, or pets.
2. Open a separate FBO escrow account at a New York state bank. For buildings with six or more units, the account must be interest-bearing.
3. Do not commingle deposit funds with operating funds at any point.
4. Within 30 days, provide the tenant with written notice of the bank name, address, and account number.
5. Conduct a move-in inspection. Document unit condition with a dated, signed report and photos. Both parties sign.

During the Tenancy

6. Track interest accrual on each deposit annually. Whatever interest the account earns belongs to the tenant. You may retain up to 1% of the deposit amount annually as an administrative fee.
7. Pay or credit interest to the tenant annually, or hold it to pay at move-out. The obligation accumulates either way.
8. If the property is sold, transfer all security deposits to the new owner within five days. Notify the tenant of the new owner’s name and address. The new owner is responsible for return of security deposits regardless of whether funds were physically transferred.

Move-Out

9. Offer a pre-move-out inspection with at least two weeks notice. For rent-stabilized units, this is now mandatory under S952B (effective November 2025).
10. Conduct the move-out inspection using the same format as move-in. Document condition with photos.
11. Calculate deductions for unpaid rent, damage beyond normal wear and tear, and permitted lease violations only.
12. Return the security deposit within 14 days of the tenant’s vacate date.
13. Deliver a written itemized statement of all deductions within the same 14-day window. Both the deposit return and the statement must happen within 14 days, not one or the other.

Post Move-Out

14. If the deposit refund check goes uncashed, start tracking the dormancy clock. Deposits unclaimed for three years become reportable state property. See the unclaimed property section below for full reporting requirements.

If you’re managing 500 units or more, the manual process breaks down fast. See how property managers at scale are handling deposit compliance end to end at rentable.com/property-managers.

Security Deposit Rules: How PMs, Landlords, and New York Tenants Work Together

A clean deposit process requires all three parties to know their role. When one drops the ball, the PM absorbs the friction.

The PM’s role is process ownership. That means standardized move-in and move-out inspection forms that both parties sign, written notices logged in the tenant file the same day they go out, interest calculations that run on a schedule rather than when someone remembers, and return deadlines tracked systematically across every active unit. The PM who runs a tight process protects everyone in the chain. The PM who doesn’t is the first call when something goes wrong.

The landlord’s role is alignment with that process. In practice this is where deposit disputes are born. A landlord who makes verbal promises about deductions, delays signing off on returns, or isn’t looped in when a deposit check goes uncashed creates problems the PM then has to solve. Good landlord-PM coordination means agreed-upon documentation standards, a clear decision chain for disputed deductions, and shared visibility into where every deposit stands at every stage.

New York tenants have rights that actively shape the process, and PMs who understand those rights in advance have fewer disputes at move-out. A tenant may request a move-in inspection before moving in. A tenant must be offered a move-out inspection with at least two weeks notice. A tenant can dispute any deduction from the security deposit and file a complaint directly with the New York state attorney general’s office if a landlord cannot provide documentation. Briefing tenants on what to expect at move-in, and what their rights are throughout the tenancy, is one of the lowest-effort ways to reduce end-of-tenancy friction.

The Full Deposit Lifecycle (This Is What Most PMs Miss)

Most property management training treats security deposits as a transaction. Collect it, hold it, return it. Done.

That framing misses the full picture, and the full liability exposure.

Here’s how the actual deposit lifecycle works for a New York property manager:

Move-in

• Collect deposit (maximum one month’s rent)
• Provide written receipt acknowledging receipt of funds
• Set up compliant escrow account (FBO, interest-bearing for 6+ units)
• Document unit condition with dated, signed inspection report and photos

Holding period

• Track interest accrual annually
• Pay or credit interest annually, or at move-out (PM’s choice, but must be done)
• Maintain records of account balance and interest calculations
• Do not commingle with operating funds at any point

Move-out

• Conduct move-out inspection (now mandatory for rent-stabilized units under S952B)
• Document condition with same inspection format used at move-in
• Calculate deductions (damage beyond normal wear and tear only)
• Return deposit and itemized statement within 14 calendar days

Post move-out (the tail most PMs ignore)

• If deposit check is mailed and goes uncashed: clock starts
• After three years of dormancy: deposit becomes abandoned property under APL §1315(2)
• Annual reporting obligation to NY Comptroller by November 1
• Failure to report: $100 per day in penalties, 10% annual interest on unreported amounts, audit lookback of 15+ years

Your property management software handles most of the transaction layer. The compliance layer (interest tracking, deadline monitoring, escheatment reporting) lives in a different place. We’ll come back to this.

For a full walkthrough of how to set up a compliant escrow account in NYC, see our dedicated guide. For the post move-out obligations, see our guide to unclaimed property obligations in New York.

Security Deposits and Interest: What NYC Property Managers Owe

For buildings with six or more units in New York, interest on security deposits is not optional. It’s a statutory obligation under GOL §7-105.

Whatever interest the account earns belongs to the tenant. The landlord may retain up to 1% of the deposit amount annually as an administrative fee, paid or credited at year-end or at move-out. The obligation accumulates either way.

The compliance gap is significant. According to Roost, only 5.6% of renters nationally ever receive deposit interest, despite it being legally required in New York and 13 other states. For NYC property managers managing buildings with six or more units, every tenant who didn’t receive their interest is a potential violation.

The exposure isn’t theoretical. In March 2025, a federal class action was filed in the Southern District of New York (Gupta v. Ocean Prime) specifically targeting a property manager for failure to use interest-bearing accounts. The case argues that even if a deposit is eventually returned, the failure to hold it in a compliant account constitutes an independent violation.

Escrow Account Requirements

For buildings with six or more units, security deposits must be held in a separate, interest-bearing bank account titled FBO (For Benefit Of) the tenants.

Two things matter here.

Separate means a different account entirely at the bank level. Not a different line item in the same account.

FBO means the account is legally structured to protect tenant funds. If the property owner goes into bankruptcy or financial distress, FBO-titled funds are protected from creditors.

Commingling deposit funds with operating funds is a violation on its own, independent of whether the deposit is eventually returned correctly. Courts and the state Real Estate Commission conduct random escrow audits. Paying interest and returning on time does not cure a commingling violation.

For a step-by-step guide to opening a compliant account, see our guide on how to set up a compliant escrow account in NYC.

Deductions: What’s Legitimate and What Isn’t

Under GOL §7-108, allowable deductions are:

• Unpaid rent
• Damage beyond normal wear and tear (with documentation)
• Unpaid utilities charged to the tenant under the lease
• Cleaning costs that exceed reasonable use (with receipts)

That’s the full list. Anything outside this framework must be returned with an itemized explanation. A landlord cannot use the security deposit to cover costs not specifically permitted under New York landlord-tenant law.

The FARE Act (June 2025) prohibits landlord-hired brokers from charging fees to tenants and caps total upfront charges at first month’s rent plus one month’s security deposit. No pet deposits. No cleaning deposits. No broker fees. The security deposit is now the only financial cushion a property manager has. Every deduction needs to hold up.

What’s never deductible: Normal wear and tear. This includes paint fading after several years, minor wall scuffs, worn carpet after four or more years of regular use, small nail holes, and loose door handles. A wall with a large hole is damage. A wall with paint that’s three years old is not.

S952B Update (November 2025): Rent-stabilized units now require a pre-move-out inspection and a written itemized statement of deductions. Every stabilized turnover since November 2025 without a documented inspection is a potential exposure.

The AG’s enforcement data makes the stakes clear. The Fairfield Properties action recovered $422,598 for 899 tenants. Improper deductions and missing itemized receipts were the core violations. Security deposits ranked in the AG’s top 10 consumer complaints for 2024.

For a full breakdown of allowable and prohibited deductions, see our guide on what NYC property managers can legally deduct.

Return Deadlines and Liability

The 14-day rule is strict liability. Not a guideline. No grace period. No reasonable effort standard.

A property manager has 14 calendar days from the tenant’s vacate date to:

• Return the deposit
• Deliver a written itemized statement of all deductions

Both. On time. Miss the window and you forfeit the right to keep any portion of the deposit, regardless of whether the deductions were legitimate.

The Appellate Division has confirmed this. In a recent case, a landlord lost all deduction rights because the itemized statement arrived on day 20. Six days late. Full forfeiture. The court didn’t consider whether the deductions were legitimate. The deadline was missed, so the deductions were void. In Karole v. West End Ave, a court awarded 2x punitive damages for willful violation.

The operational reality: NYC lease turnover peaks May through September. A 500-unit portfolio at 20% annual turnover runs roughly 60-70 move-outs in an 8-10 week window. That’s 7-9 active 14-day deadlines running simultaneously at peak. Without a systematic process, a missed deadline isn’t a possibility. It’s a prediction.

What’s coming: A8078, currently in committee, would extend the return deadline to 21 days while adding mandatory pre-exit walk-throughs, treble damages for willful retention, and a public HCR list of violating landlords. The bill hasn’t passed, but the direction in Albany is toward more enforcement.

For a complete guide to the return process and itemized statement requirements, see our guide on NYC return deadlines and liability.

Unclaimed Property: The Obligation Nobody Talks About

Almost no property management training covers this. Almost no property management software tracks it.

When a tenant moves out and their refund check goes uncashed, the clock starts. Under New York’s Abandoned Property Law §1315(2), deposits unclaimed for three years become reportable abandoned property, due to the NY Comptroller by November 1 of the reporting year.

The exposure:

• $127 million collected from audits in SFY 2024-25
• Audit lookbacks extend 15 or more years
• Penalties: $100 per day for willful failure to file
• Late-reported property accrues 10% annual interest
• False Claims Act exposure: 3x damages plus $6,000 to $12,000 per violation

KAPS transition (July 2025): The NY Comptroller switched to the Kelmar Abandoned Property System. Only NAUPA-formatted reports are accepted. Legacy NY-format reports are rejected.

The safe harbor: The Voluntary Compliance Program lets holders self-report past-due property free of interest and penalties. In SFY 2024-25, 184 companies enrolled and reported $36 million. VCP eligibility ends the moment you receive an audit contact letter.

Summer 2025 marked the three-year anniversary of summer 2022 move-outs. Those unreturned deposits are now reportable. The window to self-report cleanly is open, but not indefinitely.

For a full walkthrough of the dormancy clock, KAPS reporting, and how to use the VCP, see our guide on unclaimed property obligations in New York.

How Property Management Software Fits In

Yardi is the operational backbone for most large NYC portfolios. It handles accounting, rent collection, maintenance workflows, lease management, and financial reporting.

It doesn’t automate security deposit compliance.

What Yardi does:

• Records the deposit as a liability on the tenant ledger
• Records the return when you process it

What it doesn’t do:

• Calculate state-mandated interest on a per-unit, per-year basis
• Flag deposits approaching the 14-day return deadline
• Identify dormant deposits approaching the three-year escheatment threshold
• Generate NAUPA-formatted reports for the NY Comptroller
• Monitor the KAPS reporting calendar

That’s not a criticism of Yardi. These are compliance obligations that live outside the accounting layer.

The gap matters at scale. A 300-unit NYC portfolio at 25% annual turnover processes 75 deposit returns per year. At peak summer volume, 50 of those happen in 10 weeks. Tracking interest accrual, 14-day deadlines, and dormancy clocks manually is where compliance breaks down.

Rentable integrates natively with Yardi and covers the compliance layer: interest tracking, deadline monitoring, and dormancy reporting, without changing how your team works. Property managers don’t pay for it.

The Compliance Arc Doesn’t End at Move-Out

Most property managers think about security deposits in two moments: the day they collect it, and the day they return it.

The compliance obligation runs the full arc. Collection. Holding. Annual interest. Move-out inspection. 14-day return. Post move-out dormancy tracking. Three-year escheatment reporting. Each step has its own deadline, its own documentation standard, and its own penalty structure.

At Manhattan’s current median rent of $4,995, the average NYC security deposit is approaching $5,000. Across a 200-unit portfolio, that’s close to $1 million in held funds with compliance obligations attached to every dollar.

That’s not a spreadsheet problem. It’s an infrastructure problem.

Reach out to our Team Todaay

New York FAQs: Security Deposit Rules for Property Managers

What are the security deposit laws for property managers in New York?

New York security deposit laws require property managers to collect no more than one month’s rent as a security deposit, hold it in a separate bank account (interest-bearing for buildings with six or more units), provide the tenant with written notice of the account details within 30 days, return the deposit within 14 calendar days of move-out with an itemized deduction statement, and report unclaimed deposits to the state after a three-year dormancy period. S952B (effective November 2025) extended these security deposit rules to rent-stabilized units.

Does Yardi handle security deposit compliance in New York?

Yardi tracks security deposits as accounting entries and records returns when processed. It doesn’t automatically calculate state-mandated interest, flag 14-day return deadlines, identify deposits approaching the three-year escheatment threshold, or generate NAUPA-formatted reports for New York’s unclaimed property system. The compliance layer requires a separate solution.

What happens if a landlord fails to return the security deposit within 14 days in NYC?

New York courts treat the 14-day rule as strict liability. If a landlord refuses to return the security deposit or delivers the itemized statement after day 14, the landlord forfeits the right to keep the security deposit or make any deductions, regardless of whether the underlying claims were legitimate. New York tenants can recover the full security deposit back through small claims court or by filing a complaint with the New York state attorney general’s office. In cases of willful violation, courts have awarded 2x punitive damages. Pending legislation (A8078) would increase this to treble damages.

Are property managers required to pay interest on security deposits in New York?

Yes, for buildings with six or more units. The landlord must hold the rent security deposit in an interest-bearing account. Whatever interest the account earns belongs to the tenant. Property managers 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 the time the deposit is returned.

What is security deposit escheatment in New York?

Escheatment is the process by which unclaimed security deposits become state property. Under New York’s Abandoned Property Law §1315(2), a security deposit that has gone unclaimed for three years after the tenant’s move-out must be reported to the NY Comptroller and remitted to the state. The annual reporting deadline is November 1. Failure to report triggers penalties of $100 per day and 10% annual interest on unreported amounts, with audit lookbacks extending 15 or more years.

Last updated: March 2026. This guide reflects New York General Obligations Law as amended by S952B (effective November 15, 2025). 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.