How to book a mortgage escrow account on a rental property
Treat the money in the lender's escrow account as an asset you own, not as an expense. Each payment moves part of it into escrow. The expense for property tax and insurance is booked when the lender pays the bill, and the escrow balance goes down. Once a year the lender reviews the account, which can create a shortage to pay or a surplus to refund.
What the escrow account is
Many lenders collect a twelfth of the yearly property tax and insurance bill with each mortgage payment and pay those bills for you. The money sits in an escrow account the lender holds. It is still your money, so on your books it is an asset, usually called Escrow deposits with lender, until it is used.
Your bank statement shows one payment to the lender. Your books split it into principal, interest and escrow. The basic split is in recording a mortgage payment. This guide covers what happens inside the escrow account afterward, which that entry cannot show.
The accounts you need
| Account | Type | Goes up when | Goes down when |
|---|---|---|---|
| Escrow deposits with lender | Asset | Your payment includes escrow | The lender pays tax or insurance |
| Real estate taxes | Expense | The lender pays the tax bill | Rarely |
| Insurance | Expense | The lender pays the premium | Rarely |
Property tax is generally a deductible rental expense, and Publication 527 lists taxes and insurance among the common rental expenses. The usual cash-basis practice is to count the tax when it is paid to the taxing authority. Your lender paying it from escrow counts as paid on your behalf, so confirm the timing with your preparer.
A year of entries
Example a made-up LLC pays $1,950 a month to the lender. The lender's breakdown is principal $520, interest $1,030 and escrow $400. Each month: debit Mortgage payable $520, Mortgage interest $1,030 and Escrow deposits $400, and credit checking $1,950. After 12 months the escrow asset has grown by $4,800.
Example in the fall the lender pays the $3,900 tax bill and the $1,000 insurance premium from escrow. Debit Real estate taxes $3,900 and Insurance $1,000, and credit Escrow deposits $4,900. Starting from a $0 balance, the escrow asset goes $4,800 minus $4,900, which is negative $100. That means the account is short and the lender will ask for more.
The lender's year-end escrow statement lists every deposit and every payment. Use it as the source document. Your Escrow deposits balance should match the statement's ending balance, and any difference is something you missed or something the lender did.
Shortage, surplus and the annual analysis
Each year the lender reviews the account and sets a new monthly escrow amount. Three things can follow.
- A shortage you pay in a lump sum: debit Escrow deposits and credit checking. It is not an expense, because it refills your own asset.
- A higher monthly payment: the escrow part of each entry gets larger and the principal and interest stay the same.
- A surplus check from the lender: debit checking and credit Escrow deposits, which brings the asset down to the right balance.
If the tax bill is later disputed or lowered, the refund goes to the expense it came from. See appealing a property tax assessment.
Close-out when the loan ends
When the loan is paid off or refinanced, the lender refunds the remaining escrow balance, usually within a few weeks. Debit checking and credit Escrow deposits until the account is zero. A new loan often starts with a new escrow deposit; book it to the new loan's escrow account and keep the old one at zero. This is covered with the other closing entries in recording a refinance.
How DoorKeeping handles it
DoorKeeping's books record mortgage interest, taxes and insurance on their own Schedule E lines. Loan principal and escrow balances are not tracked in the books, so keep the lender's escrow statement with your preparer. Ask Claude or ChatGPT to read the statement and list the split for you. DoorKeeping does not give tax advice, so check the timing of tax and insurance deductions with your preparer.
Sources
- IRS, Publication 527, Residential Rental Property (2025), read Oct 30, 2026
Questions
- Is money paid into escrow an expense?
- No. It is your money held by the lender, so book it as an asset. The expense is booked when the lender pays the tax or insurance bill.
- What do I do with an escrow shortage payment?
- Debit the escrow asset and credit the bank. It refills your own balance and is not an expense.
- Where do I find the escrow balance?
- On the lender's annual escrow statement and on the monthly or online statement. Your books should match it.