How to do the bookkeeping for a mortgage escrow account on a rental property
Treat the escrow part of each mortgage payment as money you have parked with the lender, not as an expense. Record it in an escrow asset account. When the lender pays the property tax or the insurance bill out of escrow, move that amount from the escrow account to the expense. The expense happens when the lender pays the bill, not when you send the monthly payment.
What the escrow part of your payment is
Many lenders add an extra amount to each monthly payment and hold it in an escrow account (some people say impound account). When the property tax bill or the insurance premium comes due, the lender pays it for you from that account. Your payment letter shows how the total splits: principal, interest, and escrow.
For your books this means the monthly payment is three different things. Principal reduces the loan. Interest is an expense. The escrow part is a deposit that you still own, so it sits on the balance sheet as an asset until the lender spends it on your behalf.
The IRS draws the same line when it talks about buying property. IRS Publication 527 says amounts placed in escrow for the future payment of items such as taxes and insurance are not part of your cost basis in the property. They are not a cost of buying it. They are your own money waiting to pay a bill.
The monthly entry
Open one asset account called Escrow deposits held by lender. Then split every mortgage payment into three lines using the lender's statement. Never book the whole payment as one expense, or you will overstate costs in the months before a tax bill is paid and understate them after.
Example a made-up monthly mortgage payment is $1,850. The statement shows principal $420, interest $830 and escrow $600. Check: $420 plus $830 plus $600 is $1,850.
| Account | Debit | Credit |
|---|---|---|
| Mortgage payable (principal) | $420 | |
| Mortgage interest | $830 | |
| Escrow deposits held by lender | $600 | |
| Checking | $1,850 | |
| Total | $1,850 | $1,850 |
Interest is the only part that hits the profit and loss statement this month. If you want to see how the other two parts fit, recording a mortgage payment walks through the principal and interest split.
When the lender pays the tax or the insurance
The lender pays the county, and later the insurance company, without asking you. Nothing leaves your own bank account that day, so you will not see it on your bank feed. You only learn about it from the lender's escrow statement or the year-end statement. That is why many landlords forget this entry and end up with an escrow balance that grows forever.
- Property tax paid by the lender: debit Property taxes, credit Escrow deposits held by lender.
- Insurance paid by the lender: debit Insurance, credit Escrow deposits held by lender. If the premium covers more than a year, see insurance premiums paid in advance.
- Date each entry the day the lender paid, which the escrow statement shows, not the day the bill was issued.
On taxes, the IRS wording for homes is a good guide. IRS Publication 530 says you can deduct only the real estate taxes that the lender actually paid from escrow to the taxing authority, and not the total you paid into the escrow account. That publication is written for homeowners, so ask your preparer how it applies to your rental LLC, but the idea matches the entries above: the expense is what was paid out, not what was paid in.
A full year of escrow, step by step
Example a made-up rental starts the year with $1,500 in escrow. Twelve payments add $600 each, which is $7,200. The lender pays property tax of $5,300 and insurance of $1,800 from escrow, which is $7,100. The ending balance is $1,500 plus $7,200 less $7,100, which is $1,600.
| Item | Amount | Effect on the books |
|---|---|---|
| Starting escrow balance | $1,500 | Asset on the balance sheet |
| Twelve deposits of $600 | $7,200 | Asset goes up |
| Property tax paid by lender | $5,300 | Expense, asset goes down |
| Insurance paid by lender | $1,800 | Expense, asset goes down |
| Ending escrow balance | $1,600 | Must match the lender statement |
The year's expenses from escrow are $7,100, even though you sent only $7,200 and your balance rose by $100. Both facts are true at once, and the books show them both.
Shortages, surpluses and the yearly analysis
Once a year the lender reviews the account and sends an escrow analysis. It says what the lender expects to pay next year and sets a new monthly amount. If taxes or insurance went up, the account can come up short. You can usually pay the shortage in one amount or spread it over the next year's payments. If the account holds too much, the lender may send a refund.
- Shortage paid in a lump sum: debit Escrow deposits held by lender, credit Checking. It is more money parked with the lender, not an expense.
- Shortage spread into the payment: it shows up as a higher escrow amount in the monthly split above.
- Refund of a surplus: debit Checking, credit Escrow deposits held by lender.
A refund of property tax that the county itself returns to you is different. Under Publication 530 it can reduce a tax deduction. Ask your preparer if you receive one.
Three checks to keep it honest
- Once a month, compare your Escrow deposits account to the balance on the lender's statement or online loan page.
- After the county bill is due, confirm a Property taxes entry exists for the amount the lender paid.
- At year end, tie the total of tax and insurance paid from escrow to the lender's year-end statement, and send it to your preparer with the rest of the year-end package.
If the balance does not match, the usual cause is a payment the lender made that was never entered, or a monthly payment that was booked as one big expense. Fix it by entering the missing movement, not by adjusting the balance.
How DoorKeeping handles it
In DoorKeeping each property has its own books, so each LLC keeps its own escrow balance. Connect the property's bank account and the monthly payment arrives through the bank feed. Ask Claude or ChatGPT to split it using the lender's statement, then approve it with one tap. Rent stays in your own bank account: tenants pay you directly. Month-end close is the place to compare the escrow balance to the lender's statement. DoorKeeping gives no tax advice, so check tax treatment with your preparer.
Sources
- IRS, Publication 527, Residential Rental Property (2025), read Oct 30, 2026
- IRS, Publication 530, Tax Information for Homeowners, read Oct 30, 2026
Questions
- Is the escrow part of my mortgage payment a rental expense?
- No. It is money held by your lender. It becomes an expense when the lender pays the tax or insurance bill from it.
- Where does an escrow account go on the balance sheet?
- It is an asset, usually named something like Escrow deposits held by lender, next to your bank accounts.
- What if I never see the lender pay the property tax?
- Use the escrow statement, which lists each payment and its date, and enter the tax from there. The bank feed will not show it.
- Do I enter an escrow shortage as an expense?
- Usually not. A shortage you pay is more money in escrow, so it goes to the escrow asset account. Ask your preparer if it is unclear.