A real estate broker operating in New York decides to open a separate, interest-bearing account to hold security deposits for rental properties managed by the brokerage. The interest earned on these accounts is retained by the broker to cover administrative costs. Is this practice permissible under New York real estate law?
- AYes, as long as the tenants are informed in writing that the broker retains the interest.
- BYes, if the broker has a written agreement with the landlord to retain the interest.
- CNo, brokers are generally prohibited from managing security deposits for rental properties.
- DNo, security deposits must be held in non-interest-bearing accounts, or the interest must be paid to the tenant.
Show answer & explanationAnswer & explanation
Correct answer: D. No, security deposits must be held in non-interest-bearing accounts, or the interest must be paid to the tenant.
In New York, security deposits for residential rental properties must be held in an interest-bearing account. However, the interest earned on these accounts belongs to the tenant, not the broker or landlord, unless the property contains six or more units, in which case the interest can be retained by the landlord for administrative expenses. For smaller properties, the interest must be paid to the tenant.
Why the other options are wrong
- A. Informing tenants doesn't make it permissible for the broker to retain interest on residential security deposits for properties with fewer than six units.
- B. An agreement with the landlord does not override the tenant's right to interest on security deposits for smaller residential properties.
- C. Brokers can manage security deposits, but the handling of interest is strictly regulated.
NY Security Deposit Interest
In New York, security deposits for residential rentals must be in interest-bearing accounts. Interest belongs to the tenant, unless the property has six or more units, where the landlord may retain it.
- Interest-bearing accounts required.
- Tenant is typically entitled to the interest.
- Exception for properties with six or more units (landlord can retain interest).
Memory trick: Deposit interest: tenant's gain, unless the building is big.