Taxes and books

How to track earnest money from an assignment deal

Tracking earnest money (EMD) from an assignment deal means recording the deposit from your end buyer and its eventual transfer at closing. You need a clear system to ensure these funds are correctly accounted for and do not get mixed with your operating capital.

October 12, 2026 · 3 min read

What is earnest money in an assignment deal?

Earnest money in an assignment deal is a deposit made by your end buyer to show his or her commitment to purchasing the property. This money is typically held by a neutral third party, such as a title company or attorney, until closing. It protects you, the assignor, by demonstrating the buyer's seriousness.

It is not part of your assignment fee, but rather a portion of the purchase price that the end buyer is committing. If the deal closes, the earnest money is applied toward the purchase. If the buyer defaults, he or she may forfeit the EMD according to the contract terms.

Setting up your books for earnest money deposits

From a bookkeeping perspective, earnest money is not your income until the deal closes and your assignment fee is paid. You should set up a specific account in your bookkeeping software or spreadsheet to track these funds. Label it something like 'Earnest Money Held' or 'EMD Escrow Tracking'.

This account is a liability or an 'asset held for others' depending on how your specific bookkeeper advises, because the money is not yours yet. The goal is to keep these funds distinct from your operational cash or your personal accounts. This avoids confusion and keeps your financials accurate, especially if a deal falls through.

Recording the buyer's earnest money deposit

When your end buyer deposits earnest money, you need to record it. You should note the date, the amount, the property address, and the name of the end buyer. Crucially, you also need to record where the money is being held – usually the title company or attorney.

In your EMD tracking account, you would show a deposit. If you receive confirmation directly from the title company or attorney that the funds have been received, that is your primary record. Do not record it as income at this stage.

How to account for earnest money at closing

At closing, two things happen regarding the earnest money. First, the earnest money held by the third party is applied to the purchase price for the end buyer. Second, your assignment fee is paid out.

In your books, you would show a transfer out of your 'Earnest Money Held' account. This balances out the initial deposit. Then, you record your assignment fee as income. It is important that the earnest money transaction and the assignment fee transaction are recorded separately to reflect their different nature and timing.

What if the deal falls through?

If a deal falls through and the earnest money is forfeited by the buyer, or returned to him or her, you need to record this. If the EMD is returned, you would simply show a withdrawal from your 'Earnest Money Held' account, bringing its balance back to zero for that specific deal.

If the earnest money is forfeited to you, then it becomes income at that point. You would record the deposit into your operating account and categorize it as 'forfeited EMD income'. Always ensure you have documentation from the title company or attorney confirming the disposition of the funds.

Keeping earnest money separate from operating funds

It is critical that you never commingle earnest money with your business's operating funds or your personal money. This is a fundamental rule for proper bookkeeping and avoiding legal issues. The money belongs to the end buyer until closing, or until it is officially forfeited.

If you are ever in a position where you receive earnest money directly, you should immediately transfer it to the designated neutral third party. Your internal tracking system should reflect the actual flow of these funds, not just what you expect to receive.

Questions people ask

Do I pay taxes on earnest money?

You do not pay taxes on earnest money itself, because it is not your income. You only pay taxes on the profit you earn from the deal, which would be your assignment fee, or any forfeited EMD that becomes yours. This is not tax advice, consult a tax professional.

Should I have a separate bank account for earnest money?

While you typically do not hold the earnest money yourself as a wholesaler (a title company or attorney does), it is good practice to have clear accounting records for it. If you ever did hold it, a separate account would be critical to avoid commingling funds.

What documentation do I need to track earnest money?

You need the purchase agreement, the assignment agreement, and any deposit receipts or confirmation letters from the title company or attorney. These documents prove the amounts, dates, and parties involved in the earnest money transaction.