An escrow account is a bank account that is tied to a contract. Basically the landlord does not quite trust that you can make rent payments or pay for damages. So they ask you to put money into an escrow account. They are allowed to see how much money is in the account and you can not withdraw any of the money. If there is any kind of conflict around the terms of the contract, such as you not paying rent, they can easily sue you to get the money in your escrow account. The money is still yours so you report it on your taxes and you get the interest from it. But until the landlord release you from the contract you can not touch it.
I signed a lease and wired some money, and received this email. What the heck does this mean lol.
Thanks!!
“Thank you for signing your lease. Your security deposit is held in an interest bearing escrow account. The interest is yours minus any handling fees. To open this escrow account with your name the bank requires that you complete a W9 as you will receive the interest. In order for us to complete things on our end we need you to sign a W9 form. For now, please sign it on Docusign, but we will need a physical copy with your original signature as soon as possible.
Here is a link to the IRS website where you can download a w9. We are also attaching one to this email. The W 9 must include your new address and an original signature, the bank will not accept a digital signature.
After you have completed the form we ask that you scan a copy and email it to us, the original should then be sent to the address below. If you need a scanner you can find multiple free options on the App Store. Unfortunately a picture will not work.”
Contracts will have language in them that explains what happens if you break the contract. For example, if you break something in the apartment, the landlord is entitled for money to repair whatever you broke.
Of course if you do break something and the landlord says “hey, bro, pay me $X to repair it” you could just say “no” or make him sue you or something. This sucks for everyone.
So instead the contract says that you need set aside $X up front that the landlord could take and use to repair stuff you broke.
But the same argument applies in reverse, what if you don’t break anything and now you need the money back and the landlord says “no”, that sucks for you.
So the deal is, you will set aside $X and put it into a bank account controlled by a “3rd party” someone who isn’t part of the contract. The 3rd party will either give the money to landlord if you break something *OR* give it back to you if you don’t.
But the thing is, *that’s still your money*, until it isn’t. So if the money is put into a bank account where it earns 4% interest, who gets to keep the interest? It’s your money, so *you* get the interest. That’s the law.
The pot of money in the bank account is called “Escrow”, the legal term for money kept by a 3rd party until it gets returned to whomever gets it by law. The interest the escrow account earns, belongs to whomever supplied the money.
Finally – interest earned in bank accounts needs to be taxed by US law. It’s your money, but you owe some portion of it to the government in your income taxes.
Again, the government and the 3rd party don’t want to just “trust” you pay up when the day comes (or you might need to be paying some portion over time every year if it’s a long term escrow account) so you need to tell the 3rd party (the bank) your Tax ID information so they know “who to bill” the taxes to.
In some cases, landlords would take your security deposit and spend it. That meant that when you moved out, they’d have to either come up with that money, or find excuses (damages) not to give it back. That still happens sometimes, and it’s a bad system.
Instead, your new landlord is taking your security deposit and putting it in a savings account. It will stay there until you move out, and it will earn interest. Probably not much interest, but some.
Because the bank will be paying you interest, they need you to sign a W9 form. That’s perfectly normal. They use that to report the few dollars you earn in interest to the IRS, who will add a few cents to your tax bill. This is the kind of thing that happens when the government gets involved in things. You live in the United States, so get used to it.
Seriously, though, it’s perfectly normal, and you should just do it. It’s a couple of papers you sign now, and you’ll get a very small amount of money for it later.
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