How to Calculate Security Deposit Interest in Massachusetts

Massachusetts law requires landlords to pay 5% simple annual interest on all security deposits. This calculation must be precise - errors can lead to legal disputes and potential penalties.

The Legal Requirement

Under M.G.L. c. 186, § 15B(3)(a), landlords must:

• Pay 5% simple interest per year
• Calculate interest from the date the deposit was received
• Include accrued interest in the final refund

IMPORTANT: This is simple interest, not compound interest. The 5% rate applies only to the original deposit amount, not to previously accrued interest.

The Calculation Formula

Basic Formula:

` Interest = (Deposit Amount) × (0.05) × (Days Held ÷ 365) `

Step-by-Step Calculation:

1. Determine the deposit amount (e.g., $2,000) 2. Calculate days held: - Start date: Date deposit received - End date: Lease termination date - Days = End date - Start date 3. Apply the formula: - Convert 5% to decimal: 0.05 - Multiply: Deposit × 0.05 × (Days ÷ 365)

Example 1: Full Year

Scenario:

• Deposit Amount: $2,000
• Days Held: 365 days (exactly 1 year)

Calculation: ` Interest = $2,000 × 0.05 × (365 ÷ 365) Interest = $2,000 × 0.05 × 1 Interest = $100.00 `

Total Refund (before deductions): $2,100.00

Example 2: Partial Year

Scenario:

• Deposit Amount: $1,500
• Lease Start: January 1, 2024
• Lease End: September 15, 2024
• Days Held: 258 days

Calculation: ` Interest = $1,500 × 0.05 × (258 ÷ 365) Interest = $1,500 × 0.05 × 0.7068493 Interest = $53.01 (rounded to nearest cent) `

Total Refund (before deductions): $1,553.01

Example 3: Multi-Year Tenancy

Scenario:

• Deposit Amount: $2,400
• Lease Start: June 1, 2022
• Lease End: August 31, 2024
• Days Held: 822 days

Calculation: ` Interest = $2,400 × 0.05 × (822 ÷ 365) Interest = $2,400 × 0.05 × 2.2520548 Interest = $270.25 (rounded to nearest cent) `

Total Refund (before deductions): $2,670.25

Common Calculation Errors

1. Using Compound Interest (INCORRECT)

WRONG: ` Year 1: $2,000 × 1.05 = $2,100 Year 2: $2,100 × 1.05 = $2,205 (compounds) Total Interest: $205 `

CORRECT (Simple Interest): ` Year 1: $2,000 × 0.05 = $100 Year 2: $2,000 × 0.05 = $100 Total Interest: $200 `

2. Rounding Too Early

WRONG: ` $2,000 × 0.05 = $100 (rounded) $100 × (258 ÷ 365) = $100 × 0.71 = $71 (loses precision) `

CORRECT: ` $2,000 × 0.05 × (258 ÷ 365) = $53.01 (maintain precision until final step) `

3. Using 360-Day Year

WRONG: ` Interest = $2,000 × 0.05 × (Days ÷ 360) [Banking convention] `

CORRECT: ` Interest = $2,000 × 0.05 × (Days ÷ 365) [Massachusetts law requirement] `

4. Incorrect Day Counting

Common Error: Counting months instead of exact days

Example:

• Lease Start: Jan 1
• Lease End: April 1
• WRONG: 3 months = 90 days
• CORRECT: Jan (31) + Feb (28/29) + March (31) = 90 or 91 days

Always use exact calendar days, accounting for leap years.

Special Considerations

Leap Years

When calculating days held across a leap year:

• Use 366 days for the leap year portion
• Use 365 days for non-leap year portions
• Simpler approach: Always use 365 in the denominator (Massachusetts courts accept this)

Partial First/Last Months

Question: Do you count the first and last day?

Answer: Massachusetts courts generally use inclusive counting:

• If deposit received Jan 1 and returned Jan 31, days = 31 (include both dates)
• This is the standard legal convention for tenancy calculations

Mid-Lease Deposit Increases

If the deposit amount increases during the lease:

• Calculate interest separately for each deposit period
• Use the deposit amount in effect during each period
• Sum the interests

Example:

• Year 1: $2,000 deposit = $100 interest
• Year 2: $2,500 deposit (increased) = $125 interest
• Total Interest: $225

Interest When Deductions Are Made

CRITICAL RULE: Interest is calculated on the original deposit amount, then deductions are subtracted from the total.

Calculation Order: 1. Calculate interest on full deposit 2. Add interest to deposit (Total Held) 3. Subtract allowable deductions 4. Result = Final Refund

Example:

• Original Deposit: $2,000
• Days Held: 365
• Interest: $100
• Total Held: $2,100
• Deductions: $300 (carpet cleaning)
• Final Refund: $1,800

DO NOT reduce the deposit amount before calculating interest.

Verification Checklist

✅ Use 5% rate (0.05 decimal) ✅ Calculate exact days held (include start and end dates) ✅ Use 365 in denominator (not 360) ✅ Apply simple interest (not compound) ✅ Round only at final step (to nearest cent) ✅ Calculate on original deposit (before deductions) ✅ Show calculation in itemized statement

Legal Consequences of Errors

Underpayment of Interest

If you calculate interest incorrectly and pay less than owed:

• Tenant can claim the shortfall
• May be evidence of bad faith
• Could support a treble damages claim

Overpayment of Interest

If you calculate too much interest and overpay:

• No legal penalty
• Tenant keeps the overpayment
• You cannot later correct or reclaim it

Bottom line: When in doubt, calculate precisely or use automated tools to ensure accuracy.

Summary

Massachusetts security deposit interest calculation requires:

• 5% simple annual interest
• Exact day counting
• 365-day year denominator
• Rounding only at final step
• Interest on full deposit (before deductions)

Precision matters. A $2,000 deposit held for 2 years generates $200 in interest - getting this wrong can cost you far more in legal fees and penalties. The 30-day deadline is non-negotiable, so accurate calculations must be completed promptly.

Remember: This article provides general information. For specific legal advice about your situation, consult a licensed Massachusetts attorney.