Every year, Real Estate Attorneys are left waiting until the beginning of January before finalizing their leases for the new year. The reason for this is that the rate of interest on a tenant's security deposit is set by the city comptroller every year, and it doesn't get published until the end of December or early January. Well, it is 2025, and that time has come; the current security deposit interest rate for 2025 has been set at .01% for the city of Chicago.
So why is this rate important to landlords in the city of Chicago? Well, the Chicago RLTO, or the Chicago Residential Landlord Tenant Ordinance, has a clause on security deposits that orders landlords to pay interest on the security deposit held on an annual basis. This means if you are holding a $1,000 security deposit in Chicago for a lease that started on April 1st, you must pay interest on April 1st of every year to your tenant, on $1000, which would mean that you must give your tenant a penny or a check for one cent each year on the anniversary of their move in date. The interest calculation for what you owe your tenant next year or this year if the .01 percent has been consistent for several years, is multiplying the security deposit amount by .0001. The amount can be applied as a credit to your tenant's account or given to them by check.
So what does the Chicago security deposit law say about not making the payment or making it late? If payment is not made at the end of each 12-month period and your tenant takes you to court, they shall be rewarded with 3 times the amount of the security deposit and attorney fees. This means if you have a $2k security deposit, you could be paying seven to eight thousand dollars in fines by forgetting to pay 2 pennies to your tenant.
So besides the interest payments, what else do we need to know about the Chicago Ordinance around security deposit funds? Here are some key rules to know before deciding whether or not to take a security deposit if you’re in Chicago and the amount of the deposit to take:
1. The rates of interest set do not have any correlation to the amount of interest you can get in an account. The good news is you are allowed to earn and leave excess interest in the account you have the security deposit in.
2. With that being said, the way you store the security deposit is of vital importance: it must be in a separate account, not commingled with your money or the money of tenants in other buildings. Illinois security deposit laws also require that the deposits be kept in a federally insured interest-bearing account at a bank that has locations in Illinois. So you cannot use online banks unless they also have a local branch.
3. The bank name and address of the financial institution must be disclosed to the tenant either on the written rental agreement, or if you change bank accounts, in writing within 14 days of moving the money.
4. When a tenant gives you the security deposit you must issue them a receipt showing that they paid it to you.
5. After the tenant moves out, you must send back their security deposit with interest within 30 days; or, within the same period of time, you must send them an itemized statement of the damages. The amount you deduct must be a reasonable amount and justified by bids you received. You must also account for depreciation, meaning if the paint was damaged and the tenant lived there for 5 years because paint should last for 5 years, you can not deduct anything for the damage. If you have to replace the carpet for $1000 but it is 3 years old, you can only charge 40% or $400 because the carpet is depreciated at 5 years.
6. You cannot have the amount of the security deposit be greater than 1.5 times the amount of the monthly rent.
If you or your property managers decide to take a security deposit instead of a move-in fee in Chicago, the six things mentioned above are some of the major points of which you must make sure you are checking off every box. This is why many landlords in Chicago have started to take a non-refundable move in fee instead of a security deposit.
A few last notes on security deposits in Illinois:
They are the property of the tenant until you have provided notice that you are using it towards fixing something after they move out.
Recently Chicago has changed the laws to allow us to use the security deposit to pay rent due by the tenant, this means if a tenant is a month behind you can have them sign off on releasing the security deposit to pay for the unpaid rent.
If a tenant pays via electronic funds or with one check for first months rent and security deposit, it is ok for those funds to be deposited at first into the same account along with the rent as long as you transfer it to a separate federally insured interest-bearing account as soon as possible. However, if they give you two separate checks it would be considered comingling to deposit the security check into your rent account first.
In the state of Illinois if it quacks like a duck and walks like a duck, it is a duck. This means that you can not get around these rules by calling them something else. The courts have specifically come down on landlords collecting last month's rent along with a security deposit or instead of a security deposit. Such a deposit is taken to make the landlord feel secure that they will get payment from a tenant down the road and thus must be treated as a security deposit.
*Please note this is not legal advice, and this article is for informational purposes only. Please reach out to your property managers and attorneys to make sure you are in compliance with the Chicago Residential Landlord Tenant Ordinance and Illinois Security Deposit Interest Act. If you are looking for a property management company that has your back and protects the assets of the landlord, click here and let’s chat about how we can make sure you are protecting your investments. Whether a single building, or a big portfolio, we are here to help.
