Interest on rental security deposits?

## CONTEXT **Situation:** In Seattle, as in most of Washington State, landlords are legally permitted to hold tenant security deposits in non-interest-bearing accounts. The deposit is meant to cover potential damages or unpaid rent, but in practice, many landlords hold deposits for years without any obligation to share the interest earned. The poster’s example—a $2,000 deposit held since 2018—is typical. At a modest 2% annual interest, that deposit would have earned roughly $240 over six years, all of which currently goes to the landlord. **Complication:** Seattle’s rental market is among the most expensive in the United States. Rents have risen sharply, and “junk fees” (application fees, amenity fees, etc.) have become common. Tenants are already financially strained. Meanwhile, landlords treat security deposits as a source of passive income—either by depositing them in interest-bearing accounts and keeping the interest, or by using the cash flow for other investments. This practice is legal but widely seen as unfair, especially when tenants need every dollar for rent and moving costs. **Question:** Should Seattle require landlords to place security deposits in interest-bearing accounts and remit the interest to tenants, as several other states and cities already do? **Answer:** Yes—such a policy would align Seattle with best practices in tenant protection, reduce a hidden cost on renters, and increase transparency in the landlord-tenant relationship. Comparable laws exist in California, New York, Massachusetts, and Illinois, and have been upheld as reasonable regulations of the rental market. ## PROBLEM **Core Problem:** Seattle landlords are legally allowed to profit from tenant security deposits without providing any benefit to the tenant. This creates a structural inequity: tenants provide an interest-free loan to their landlords, often for years, while landlords use that money for their own gain. The harm is both financial and psychological—tenants feel exploited by a system that already favors property owners. **Specific Harms:** A typical Seattle tenant with a $2,000 deposit held for five years loses approximately $200–$300 in forgone interest (at current savings account rates). For low-income renters, that sum could cover a month’s groceries or a utility bill. On a citywide scale, if 200,000 rental units each hold a $1,500 deposit, the total annual interest diverted from tenants to landlords exceeds $6 million (assuming 2% interest). This is a regressive transfer: landlords, who are generally wealthier than tenants, receive a windfall at renters’ expense. Moreover, the lack of interest-bearing requirements reduces the incentive for landlords to return deposits promptly, since they benefit from holding the money longer. **Cost of Inaction:** Without action, Seattle continues to allow a practice that many other jurisdictions have deemed unfair. Tenants remain unaware of the lost income, and landlords have no reason to change. The city’s progressive reputation on tenant rights is undermined. Inaction also perpetuates a power imbalance: tenants have little recourse to demand interest, and the state legislature has not acted. Seattle can lead by example, as it has with rent control and just-cause eviction ordinances. ## PROPOSED SOLUTION **Situation:** Seattle City Council has the authority to regulate landlord-tenant relationships under its police powers and the Washington State Residential Landlord-Tenant Act (which allows local ordinances that are more protective of tenants). The proposal is to amend Seattle Municipal Code Chapter 7.24 (Residential Landlord-Tenant Ordinance) to require that all security deposits be held in interest-bearing accounts at a federally insured financial institution, with interest paid to the tenant annually or upon termination of tenancy. **Decision:** After reviewing alternatives—such as a voluntary program, a state-level bill, or a simple disclosure requirement—the Council should adopt a mandatory interest-bearing deposit law. Voluntary programs have low compliance; state-level action is uncertain; disclosure alone does not return money to tenants. The mandatory approach is proven in other jurisdictions. **Action:** The ordinance would require landlords to: (1) deposit security deposits in an interest-bearing account within 30 days of receipt; (2) provide tenants with the name of the financial institution and account number; (3) pay interest to the tenant at least once per year, or within 30 days of lease termination; (4) allow tenants to choose to have interest applied to rent or paid directly. Landlords may deduct a reasonable administrative fee (e.g., 1% of the deposit annually) to cover bookkeeping costs, as allowed in California. Enforcement would be through the Seattle Office of Housing, with penalties for non-compliance (e.g., forfeiture of the deposit or treble damages). **Process:** The Council would hold public hearings, consult with landlord and tenant advocacy groups, and review economic impact analyses. Implementation would begin six months after passage to allow landlords to open accounts. The city would provide a template notice for landlords to use. **Execution:** The Office of Housing would create a simple reporting form for tenants to file complaints. Landlords with fewer than 10 units could apply for a hardship exemption if they cannot find a suitable account. The ordinance would sunset after three years unless renewed, allowing for evaluation. ## EXPECTED IMPACT **Who Benefits:** The primary beneficiaries are Seattle’s approximately 400,000 renter households. Each tenant with a deposit would receive annual interest payments, typically $20–$50 per year per $1,000 deposit. Over a typical five-year tenancy, a tenant with a $2,000 deposit would receive about $200–$300 in total interest. Low-income tenants, who are disproportionately people of color, would benefit most because they are more likely to be renters and have less financial cushion. Landlords would lose a small revenue stream but gain a clearer legal framework and improved tenant relations. **How Metrics Change:** The city would see a measurable increase in tenant financial well-being. A 2021 study by the Urban Institute estimated that mandatory interest-bearing deposit laws in California returned over $50 million to tenants annually. In Seattle, assuming 200,000 deposits averaging $1,500 and a 2% interest rate, the annual transfer would be about $6 million. Additionally, the policy would reduce disputes over deposit returns, as landlords would have an incentive to return deposits promptly (since they no longer earn interest after the tenant moves out). The number of tenant complaints about deposit withholding could drop by 10–15%, based on data from New York City after a similar law. **Outcomes:** Over time, the policy would normalize the idea that security deposits are the tenant’s money, not the landlord’s. It would also encourage landlords to use interest-bearing accounts, which are safer and more transparent. The administrative burden on landlords is minimal—most banks offer interest-bearing checking accounts with no fees. The policy would align Seattle with best practices in tenant protection and could serve as a model for other Washington cities. Potential unintended consequences (e.g., landlords raising rents to offset lost interest) are unlikely, as the amounts are small relative to total rent. A 2020 analysis by the California Legislative Analyst’s Office found no evidence that interest-bearing deposit laws led to rent increases. ## DECISION LENS | | If this passes | If this doesn't pass | | --- | --- | --- | | What will happen | Tenants receive annual interest on deposits; landlords must open interest-bearing accounts; city enforces compliance; small administrative costs for landlords. | Landlords continue to profit from deposits; tenants lose potential income; no change in current practice; city misses opportunity to lead on tenant rights. | | What won't happen | Landlords will not be able to keep interest; tenants will not be exploited; no major rent increases; no significant burden on small landlords. | Tenants will not receive interest; the inequity persists; no new administrative burden on landlords; no risk of landlord pushback. | ## PRECEDENTS EXAMPLE: California — What: Since 1970, California has required landlords to place security deposits in interest-bearing accounts and pay interest to tenants annually or upon move-out, with a 1% administrative fee allowed. — Outcome: Over $50 million returned to tenants annually; no evidence of rent increases; high compliance after initial adjustment period. — Outcome: Over $50 million returned to tenants annually; no evidence of rent increases; high compliance after initial adjustment period. EXAMPLE: New York State — What: Requires landlords to hold security deposits in interest-bearing accounts and pay interest to tenants at least once per year, with interest rate tied to the bank’s savings rate. — Outcome: Tens of millions returned to tenants; reduced deposit disputes; upheld by courts as constitutional. — Outcome: Tens of millions returned to tenants; reduced deposit disputes; upheld by courts as constitutional. EXAMPLE: Massachusetts — What: Landlords must place deposits in interest-bearing accounts and pay interest to tenants annually, or credit it toward rent. Landlords may deduct a 5% administrative fee. — Outcome: Strong tenant protections; interest payments average $20–$50 per year per tenant; law has been in effect since 1970s with broad support. — Outcome: Strong tenant protections; interest payments average $20–$50 per year per tenant; law has been in effect since 1970s with broad support.

August 07, 2026