Taxes and books

How to bookkeep property tax escrow payments for your rental properties

When managing rental properties, property tax escrow payments need careful bookkeeping to distinguish them from direct property tax expenses. These payments are typically treated as a liability until the funds are disbursed by the lender to cover the actual tax bill.

October 12, 2026 · 3 min read

Understanding the escrow account

An escrow account holds funds on behalf of a third party, in this case, your mortgage lender. Each month, a portion of your mortgage payment goes into this account specifically to cover future property tax bills. The money belongs to you until it is disbursed, but it is controlled by the lender for a specific purpose.

Think of it as a holding tank for funds. It is not an expense at the moment you pay into it, but rather a temporary asset or a reduction in your cash that will eventually be used to pay an expense. This distinction is crucial for accurate bookkeeping for your buy-and-hold properties, as discussed in /for/buy-and-hold.

Recording monthly escrow payments

When you make your monthly mortgage payment, you need to break down its components: principal, interest, and escrow. The principal portion reduces your loan balance, interest is an expense, and the escrow portion should be recorded as an increase to an asset account called 'Escrow Impound Account' or similar.

Do not record the escrow portion as an expense when you pay it. This would prematurely inflate your expenses. Instead, treat it as money you are putting aside, even though the bank holds it. This accurately reflects that you still have an interest in those funds.

Accounting for actual tax disbursements

The actual property tax expense occurs when the lender pays the tax authority from your escrow account. At this point, you will receive a notification from your lender or see it on your mortgage statement. This is when you record the expense.

When the payment is made, you will decrease your 'Escrow Impound Account' asset by the amount paid out and record a 'Property Tax Expense' for the same amount. This method correctly allocates the expense to the period in which the taxes are actually paid, not when you made the monthly contributions to escrow.

Handling escrow surpluses or shortages

Lenders periodically review escrow accounts to ensure enough funds are collected. If there is a surplus, he or she might return the excess funds to you or apply it to future payments. If there is a shortage, your monthly escrow payment will increase to cover the deficit.

If you receive a refund, record it as a reduction in your 'Escrow Impound Account' and an increase in your bank account. If your payment increases due to a shortage, simply adjust your monthly entry for the escrow portion. These adjustments keep your escrow account balance accurate.

Software for tracking escrow

Using accounting software or a dedicated spreadsheet can simplify tracking escrow payments. Set up an asset account for your escrow and expense accounts for property taxes. When you enter your monthly mortgage payment, you can split it into its components.

Many software solutions allow for recurring transactions, which means you only need to set up the split once. This helps ensure consistency and reduces the chance of errors in your bookkeeping. Remember, this information is for bookkeeping purposes and not tax advice.

Year-end reconciliation for tax purposes

At year-end, you will receive a mortgage interest statement (Form 1098) from your lender. This statement typically includes the total amount of property taxes paid from your escrow account during the year. This is the figure you will primarily use for tax reporting, not the total amount you paid into escrow.

Always reconcile your internal records with the lender's statement to catch any discrepancies. This ensures your books are accurate and align with official documents. Consult with a qualified tax professional for specific tax advice regarding your properties.

Questions people ask

Is the escrow payment an expense?

No, the monthly payment into escrow is not an expense; it is a transfer of funds into a holding account. The expense is recorded only when the lender actually pays the property taxes from that account.

What if my escrow changes yearly?

Your monthly bookkeeping entries will need to be updated to reflect the new escrow amount. Always verify the breakdown of your mortgage payment with your lender's statement.

Do I need a separate bank account for escrow?

No, you do not need a separate bank account for funds held in escrow by your mortgage lender. The escrow account is managed by the lender, not directly by you, though you track its balance in your books.