interest bearing escrow account
In: Economics
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.
Latest Answers