Q: I live in a large market-rate apartment building on the Upper West Side. My landlord placed my security deposit in an interest-bearing account, as required by law. The account only pays 1 percent and the bank sends the full interest earnings to my landlord each month as a fee permitted by New York state. However, at the end of the year, I received a 1099 for the interest earned even though I never received the funds. Is this legal? And isn’t the landlord obligated to put the deposit in a higher-earning account considering that any earnings above 1 percent go to me?
A: You are correct: Your landlord is required to put your security deposit in an interest-bearing account, and New York state permits landlords to keep 1 percent interest on your security deposit as an administrative fee.
So if the interest is only 1 percent, you wouldn’t receive anything above and beyond that.
State law requires that in buildings with six or more units, the security deposit must be kept in an account in a New York state bank. The account “shall earn interest at a rate which shall be the prevailing rate earned by other such deposits made with banking organizations in such area.”
We checked with Bankrate.com, which tracks interest rates, and the national average interest on a savings account is currently 0.52 percent, though better accounts earn 10 times that.
The situation you describe is common. But landlords are trustees and have a fiduciary responsibility to hold the money in an account with the highest possible interest rate, said David Hershey-Webb, a tenant lawyer in Manhattan. “Part of that duty is to act in the best interest of the tenant,” he said.
Your landlord must tell you the name and address of the bank, and the account number. You can write a letter to the landlord, demanding that the security deposit be put in a higher-interest account, Mr. Hershey-Webb said. Tenants must have the option of collecting their share of the interest annually, applying it to their rent, or receiving it at the end of the lease term.
Though it might seem strange that you are receiving a 1099 for interest that you never received, the bank is acting appropriately. This interest is considered your income, and the interest that your landlord takes as an administrative fee is considered additional rent.
When a security deposit is being held for a primary residence, a tenant cannot deduct this income. “In this case, the fee is being funded by the interest income earned on the security deposit, but that doesn’t change whether the tenant is entitled to a deduction,” said Louis Tuchman, a New York-based partner who practices tax law at Herrick.
For weekly email updates on residential real estate news, sign up here.
