Taxes and books

How to track earnest money deposits in your books

Tracking earnest money deposits in your books requires a clear system to distinguish them from your operating funds. This ensures proper accounting for these transactional funds.

October 9, 2026 · 3 min read

What earnest money is from an accounting perspective

From an accounting perspective, earnest money is not an expense or income when it's first paid out. It is typically a refundable deposit held in escrow, showing your commitment to a deal. Think of it as a temporary asset or a pre-paid amount.

If the deal closes, the earnest money usually gets applied toward the purchase price. If the deal falls through, it might be returned to you or forfeited. How it's recorded depends on these outcomes. This is not tax advice; consult a qualified accountant for your specific situation.

Setting up an earnest money account or tracking method

It is good practice to track earnest money separately from your main operating expenses. You can create a dedicated 'Earnest Money Deposits' account in your accounting software, or a specific column in your spreadsheet. This helps prevent commingling funds.

Label each entry clearly with the property address, the date paid, the amount, and the recipient (e.g., title company or escrow agent). This detail is critical for reconciliation and if you need to retrieve these funds later.

Recording earnest money paid out

When you send an earnest money deposit, record it as a transfer from your bank account to the 'Earnest Money Deposits' asset account. It should not be categorized as an expense at this stage. This reflects that the money is still yours, just temporarily held elsewhere.

The transaction should show the amount, date, and a memo indicating the specific property and purpose. This provides a clear audit trail for each deposit you make.

Recording earnest money received back or applied

If a deal falls through and your earnest money is returned, record it as a transfer back from the 'Earnest Money Deposits' account to your bank account. This reverses the initial entry and clears the balance for that specific deal.

If the deal closes, the earnest money is typically applied towards the purchase price. In your books, you would transfer the amount from the 'Earnest Money Deposits' account and apply it to the asset account for the property being acquired. This is the point where it becomes part of the property's cost basis, not an expense.

Year-end considerations for earnest money

At year-end, review all outstanding earnest money deposits. Any funds still held in escrow for ongoing deals should be reflected in your 'Earnest Money Deposits' asset account. This ensures your balance sheet accurately represents your assets.

If any earnest money was forfeited during the year, that would typically be recorded as an expense or loss at the time of forfeiture. Conversely, if you received earnest money from a buyer that you kept, that would be recorded as income. Again, this is not tax advice; consult an accountant.

Questions people ask

Is earnest money an expense?

Earnest money is typically not an expense when you first pay it. It's usually a deposit held in escrow. It becomes part of the property's cost if the deal closes, or an expense/loss if forfeited.

What if I lose my earnest money?

If you forfeit your earnest money, it would be recorded as an expense or a loss in your books for that specific deal. Make sure to document why it was lost and for which property.

Do I track it for every deal?

Yes, you should track earnest money for every deal where it's involved. Each deposit needs its own clear record, linked to the specific property, to maintain accurate bookkeeping and simplify reconciliation.