Types of Escrow Bank Accounts for Landlords: Uses, Setup & Management 2026

Managing money across multiple properties can be challenging. Security deposits, taxes, and insurance each need to be tracked and kept separate, or you risk stepping into compliance issues, legal trouble, and unhappy tenants.

Escrow bank accounts help you avoid such risks. These accounts keep your finances organized and protected, so you stay in control. In this guide, we’ll break down eight types of escrow accounts you should know, what each one does, and how to use them the right way.

Key takeaways

• Escrow accounts help landlords stay compliant by separating funds like security deposits, prepaid rent, and property taxes.
• Different types of escrow accounts serve different needs, from rent disputes to construction payouts.
• Setting up the right escrow account can reduce risk, simplify accounting, and build tenant trust.
• Not all escrow accounts are legally required, but using them can protect your finances and reputation.

What is an escrow bank account for landlords?

An escrow bank account is a specialized account that holds funds on behalf of someone else, such as your tenants, until certain conditions are met. For rental properties, this usually means holding tenant deposits, property tax payments, or repair funds safely until they are released.

Think of it like a secure holding area for money that doesn’t belong to you yet—or money that must be carefully tracked and used for specific purposes. By keeping these funds separate from your personal or operating accounts, you protect yourself legally and financially.

8 types of escrow bank accounts landlords use

Below are the most common types of escrow accounts in banking you should know about.

Escrow bank account for security deposits

Best for: Landlords managing long-term rentals

Security deposit escrow accounts hold tenant deposits safely until the lease ends. Many states, like Connecticut, Maine, and Minnesota, legally require landlords to keep security deposits in a dedicated escrow account. Even if your state doesn’t mandate it, using one is smart—it protects tenant funds, keeps your finances organized, and reduces the risk of legal disputes.

Funds remain in landlord-tenant escrow accounts for the lease term plus 14–60 days after move-out, depending on state law. For example, you must return security deposits in New York within 14 days after the lease ends.

How it works

• Open a dedicated trust or escrow account at your bank (often required to be in the same state as your rental property).
• Deposit each tenant’s security deposit into this account at lease signing.
• Depending on state law, inform tenants of the account details or provide annual interest statements.
• At lease end, inspect the property, deduct any lawful charges, and return the remaining balance within the mandated timeframe.

Benefits

• Avoid legal trouble by preventing misuse of tenant funds.
• Simplifies compliance with deposit-return timelines.
• Builds tenant trust by clearly separating their money.

Mortgage/PITI escrow account

Best for: Landlords with lender-financed properties

Mortgage escrow accounts, often included in PITI (Principal, Interest, Taxes, Insurance) payments, simplify budgeting by collecting money monthly to cover property taxes and insurance. Lenders typically require these accounts to ensure timely payments.

How it works

• A portion of your monthly mortgage payment goes into the escrow account.
• The lender or escrow manager pays property taxes and insurance as due.
• The account is reviewed annually to adjust for changes in taxes or insurance premiums.

How long can you hold funds

Funds are held for the life of the loan, with payments disbursed as taxes and insurance become due.

Benefits

• Ensures taxes and insurance are paid on time, avoiding penalties.
• Reduces budgeting stress by spreading large expenses into manageable monthly amounts.
• Lender-managed disbursements reduce administrative work.

Property tax escrow account

Best for: Landlords who want to avoid large lump-sum tax bills

Property tax escrow accounts allow you to set aside funds monthly for annual property taxes. This reduces the risk of missed payments and keeps your finances predictable. You can hold funds in a property tax escrow account until property taxes are paid annually.

How it works

• Deposit a portion of rent or operating funds into the escrow account regularly.
• Disburse the money when property taxes are due.

Benefits

• Avoids large, unexpected tax bills.
• Helps maintain good standing with tax authorities.
• Simplifies record-keeping for multiple properties.

Prepaid rent escrow account

Best for: Landlords collecting multiple months’ rent upfront

If tenants pay rent in advance—like last month’s or a full year’s rent—prepaid rent escrow keeps the money separate and safe until it’s due. Funds in escrow account for rent payments can be held until the month’s rent is due, sometimes with annual interest if the law requires.

How it works

• Deposit all prepaid rent immediately into a dedicated escrow account.
• Withdraw funds monthly as each rent payment becomes due.
• Provide annual interest statements if required by state law (e.g., Massachusetts).

Benefits

• Protects funds from accidental use.
• Ensures compliance with state laws for prepaid rent.
• Simplifies refunding unused rent if tenants move early.

Lease-option/Rent-to-buy escrow account

Best for: Landlords offering rent-to-own agreements

In lease-option deals, tenants pay rent plus credits toward a future property purchase. Escrowing these credits and option fees keeps them safe and separate from your operating funds.

Typically, the fund-holding timeline is 1–3 years, depending on the lease-option contract, until closing or contract expiration. Rent credits and the option fee are applied toward the purchase if the tenant buys the property. If not, the funds are usually forfeited unless the agreement says otherwise.

How it works

• Place upfront option fees (1–7% of purchase price) in escrow until closing.
• Deposit monthly rent credits in the same account.
• Apply funds to purchase if the tenant exercises their option; otherwise, follow contract terms.

Benefits

• Protects tenant funds meant for future purchase.
• Encourages trust and follow-through in rent-to-own agreements.
• Prevents misuse of option fees or credits.

Dispute/rent escrow account

Best for: Tenants and landlords in court-supervised disputes

When tenants face major habitability issues, rent escrow allows them to deposit funds into a neutral account rather than directly to the landlord. Funds in this account stay for typically 30-90 days until the issue is resolved. The court then decides how to distribute the funds based on repairs or legal outcomes.

How it works

• Tenant notifies landlord and gives time to fix issues.
• If unresolved, the tenant deposits rent into a court-controlled escrow account.
• Funds are released in accordance with court rulings following dispute resolution.

Benefits

• Protects tenants from eviction for withheld rent.
• Keeps funds neutral and transparent.
• Encourages landlords to complete repairs promptly.

Construction or renovation escrow account

Best for: Landlords funding major repairs or upgrades

Construction escrow accounts manage large renovation budgets, releasing funds in stages as work is completed to prevent misuse.

Due to the extended duration of these projects, funds may be held in a construction escrow account for 30 to 180 days, depending on the project's scope and specific milestones.

How it works

• Place the total construction budget into an escrow account.
• Release funds in stages based on inspections or milestone approvals.
• Escrow agent or inspector verifies completion and lien waivers before payment.

Benefits

• Ensures funds are used as intended.
• Protects against unfinished work or lien disputes.
• Keeps contractors accountable for deadlines and quality.

Insurance claim escrow account

Best for: Landlords rebuilding after property damage

Insurance claim escrow accounts hold funds received from insurance payouts and manage disbursement to contractors or repair services. The escrow timeline for an insurance claim extends until all necessary repairs are finished and all disbursements have been completed.

How it works

• The insurance company deposits funds into escrow.
• Funds are released as repairs are completed and verified.

Benefits

• Ensures insurance payouts are used for intended repairs.
• Reduces risk of financial mismanagement.
• Simplifies project tracking after property damage.

How to open and manage an escrow bank account

Below is a step-by-step to help you open and manage your Escorw bank accounts.

Step 1: Choose an escrow provider (bank or a banking platform)

Start by picking a neutral, licensed third party to hold funds securely until conditions are met.

Key factors to consider:

• Check if the bank escrow services or escrow account banking platform offers accounts for your specific use case
• Look for flexible account structures, including multiple sub-accounts for better fund tracking
• Ask about setup fees, monthly charges, and disbursement policies
• Read reviews and confirm FDIC insurance for held funds

Step 2: Prepare and submit required documents

Collect key documents to open your escrow account:

• Signed purchase/lease agreement
• Property details (address, legal description)
• All parties' contact info and IDs (driver's license or passport)
• Proof of funds

Depending on the escrow account type, you’ll also need an earnest money check (1-3% of the sales price), a full security deposit for rentals, or project plans for construction.​

Step 3: Deposit funds and activate the account

Once your account is open, the next step is to move funds into the escrow account. This varies depending on the agreement and type of the account, but generally involves one or both parties funding the account.

Ways to fund the account:

• A tenant deposits prepaid rent or a security deposit at lease signing
• A buyer sends earnest money as part of a home purchase
• A landlord transfers funds for large repairs or capital improvements

Step 4: Manage and monitor the account

Escrow accounts aren’t set-it-and-forget-it. Someone needs to monitor the activity, especially when funds are held for long periods or across multiple transactions.

Best practices for escrow account management:

• Assign a responsible third-party or internal team member to oversee the account
• Keep detailed transaction records with supporting documents
• Match deposits and disbursements to the timeline in your escrow agreement
• Reconcile account balances regularly to avoid errors

Step 5: Escrow bank account withdrawal​s

Funds aren’t released from an escrow account until agreement conditions are met. That could mean completing a property inspection, reaching a payment milestone, or confirming compliance with local laws.

Before initiating a withdrawal:

• Confirm that all parties agree that the trigger condition has been met
• Use documented authorization (digital or written)
• Track withdrawal amounts against the original escrow amount to avoid overdrawing

Close the escrow account when no longer needed

Once all funds are disbursed and the agreement is fulfilled, you can close the escrow account. Finalize all reports and documents and notify the required parties. We highly recommend retaining any records for audit or legal compliance (usually 3–7 years, depending on your location)

Escrow bank account fees and costs to consider

Escrow accounts serve diverse purposes in real estate, and as a result, fees vary by type, provider, and scale rather than following a one-size-fits-all model.

Fees typically include a one-time setup fee (flat or percentage-based), low ongoing management fees, and per-action charges such as disbursements.​​

Here’s a quick rundown of typical fees associated with different escrow account types.

Pros and cons of an escrow bank account

There are many benefits of an escrow account, but there are also some limitations associated with its management. Here’s a quick breakdown of the advantages and disadvantages of an escrow account.

Pros

• Ensures timely payments: Escrow accounts ensure timely payment of property taxes and insurance premiums by automating the process, reducing the risk of missed or late payments.
• Simplify budgeting: By distributing large annual expenses into manageable monthly payments, escrow accounts help you maintain consistent cash flow and avoid the burden of lump-sum payments.
• Mitigate funds shortfall: Escrow accounts often include a cushion to cover unexpected increases in taxes or insurance premiums, ensuring sufficient funds are available when payments are due.

Cons

• Potential for incorrect estimates: If the escrow account underestimates tax or insurance costs, landlords may need to cover shortfalls, leading to unexpected expenses. ​
• Potential for escrow shortages: If property taxes or insurance premiums increase and the escrow account doesn't have sufficient funds, you may face a shortage. This could result in unexpected increases in your monthly mortgage payments to cover the deficit.

Organizing rental funds the right way

Escrow accounts are often legally mandated for specific purposes, such as security deposits in many states. But, even if they’re not, what matters most is how clearly and responsibly you manage your rental funds. Baselane helps you do just that and more.

Its integrated banking and bookkeeping help you organize property accounts, automate bookkeeping, and get visibility into your cash flow–no matter whether you want to track security deposit funds or mortgage payments. Create your Baselane account today!