What is an Escrow? | IRS Definition of a Escrow

An escrow account is an account held by a trusted third party to complete a transaction. The most common type of escrow account occurs during a home sale. The buyer will send money to the escrow company. The escrow company will verify the transaction and make sure the deed is filed before it sends the money to the seller. This ensures that the buyer gets the home and the seller gets the money, rather than there potentially being a one-sided transaction.

Usually escrow companies hold assets for only short periods of time. But there can also be escrow accounts for things such as legal debts, to ensure that everyone knows that the money has been set aside for the legal fund. Escrow companies are held by the escrow company but they don’t belong to the escrow company, and they don’t usually require a separate taxpayer identification number for this reason.

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Written by Maurice Mallory

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