Separate account for security deposits?

I am still searching the forum for an answer to this but wanted to post it to see if any of you can answer.

When the tenant hands in the security deposit, should it be deposit into a separate bank account? I am presuming it is a savings account because of the common law that states if the tenant stays more than 2 years, I have to give them the interest accrued on the deposit.

So it sounds like to me it is not supposed to go into a checking account but a savings account? But is it a separate savings account for only security deposits as to avoid comingling of funds?

It is a state issue. Some have no rules and you can do what you want. Others have very specific rules regarding the type of institution, how much interest must be paid, and how it must be kept separate from LL funds. I use a bank that allows a master/slave account. Deposits go into sub-accounts and the bank sends the 1099s to the tenants. I prefer this setup to the way some LLs use the tenant’s information for the bank information. That’s OK until a tenant’s creditor learns about the money in account and seizes it.

Some states have different rules depending on the type of property as well. In IL, I don’t have any certain special rules because my property is not a 25 unit or larger. If the property was 25 or more units, I would have to pay the tenant interest on the amount held. Make sure you find out if there are any special rules for your specific situation. It’s always a good idea to do a search online for your state’s landlord/tenant laws. You’ll find out this information and also other info about what rights you and the tenants have.