Who gets the interest earned on money held in escrow?

The interest earned on money held in escrow does not have one owner across the board: it belongs to whoever the applicable contract, statute, or trust accounting rule says it belongs to, and that default changes completely depending on which of four common escrow situations the money is in. In a home purchase, earnest money interest usually follows the deposit itself to whichever party is entitled to the funds at closing or termination. In a mortgage servicer's tax-and-insurance escrow, the homeowner gets the interest only in the states that require it by law. In a lawyer's client trust account, small or short-term deposits are pooled and their interest goes to a state legal aid fund, never to the lawyer or the client. In an M&A indemnification escrow, the interest is contractually assigned, and the market default is to pay it to the seller along with the principal when the escrow releases.

Money that sits for weeks or months earns something wherever it is parked, and on larger balances or longer holding periods that "something" is not trivial. This article uses US rules throughout — state real estate practice, federal mortgage-servicing law, IOLTA programs, and typical M&A deal terms — and it is general information, not legal or tax advice; a reader outside the US should check the equivalent rule in their own jurisdiction before relying on any of it. The rest of this article works through each context with its own worked numbers, names the US states that force the issue for mortgage escrow, and explains the legal reasoning that sends some escrow interest to legal aid organizations instead of to the depositor.

Who gets escrow interest, by type of escrow?

The default owner of escrow interest is set by a different rule in each of the four contexts a buyer, seller, or attorney is likely to run into, and none of the four rules transfers to the others.

Does earnest money in a home purchase earn interest?

Earnest money earns interest only when the purchase contract or escrow instructions specifically place it in an interest-bearing account, and absent that instruction most earnest money deposits sit in a standard, non-interest-bearing escrow account for the whole transaction. An earnest money deposit is paid by a homebuyer to show their interest is legitimate and they intend to close on a home, and to protect the funds, it is held securely in an escrow account until closing or any disputes are resolved. That protective function — proving the deposit is safe and available — does not require the account to pay interest, so many brokers and title companies default to a plain checking-style escrow account unless someone asks for more.

State real estate licensing rules often spell this out directly for the brokers who commonly hold these deposits. Under the Illinois Real Estate License Act, an escrow account must be non-interest bearing, unless the parties to the transaction specifically require, in writing, that the deposit be placed in an interest-bearing account, or if the deposit is required by law to accrue interest. Where the law does require interest, the sponsoring broker must indicate in writing who will be receiving the interest from the account. That written designation is the single most important piece of paper in this whole question: without it, a dispute over a few dollars of interest on a modest deposit is rarely worth litigating, but the contract clause is still what controls.

A worked example shows why the amounts are usually small. Take a $500,000 home purchase with a 2% earnest money deposit, or $10,000, held in escrow for 45 days while the deal moves from contract to closing. If the parties had specifically required an interest-bearing account paying a money-market rate of 4.5% APY, the deposit would earn $10,000 × 4.5% × (45 ÷ 365), or about $55, over that period. That is the entire pool of money the "who gets it" question is fighting over in a typical residential deal — real, but small enough that most contracts simply let it follow the deposit rather than treat it as a separate line item.

Who gets the interest on earnest money — the buyer or the seller?

By default, interest earned on an earnest money deposit follows the deposit itself to whichever party the contract or the outcome of the deal entitles to the principal. A standard escrow clause used in many purchase agreements states plainly that all interest earned on the earnest money deposit shall be paid to the party entitled to the earnest money deposit. That means if the deal closes normally, the buyer's deposit and its interest are both credited toward the purchase price or returned, and if the buyer defaults and the seller is awarded the earnest money as damages, the seller typically receives the interest along with it. If the parties disagree on entitlement, the clause generally lets the escrow agent hold both the principal and the accrued interest together until the dispute is resolved or a court decides, rather than splitting the question into two separate fights.

Interest on a deposit large enough or held long enough to actually matter is taxable to whoever receives it. While earnest money is held in the escrow account it may accrue interest, and if the interest earned exceeds $600, the recipient might need to complete a W-9 for the escrow or closing company to receive it. Below that $600 threshold, the recipient doesn't need to complete a W-9 to retrieve the money since the interest is under $600. The escrow or closing agent is the one who tracks this, not the buyer or seller, so it rarely becomes visible unless someone asks for the accounting.

Do mortgage servicer escrow accounts for taxes and insurance pay interest?

A mortgage escrow account used to collect and pay property taxes and homeowners insurance pays interest to the homeowner only in the states that require it; everywhere else, the balance typically earns the lender or servicer an interest-free float with nothing passed back to the borrower. Most mortgage escrow accounts do not earn interest for the borrower: no federal law requires lenders or loan servicers to pay interest on the money they hold in escrow, and the majority of states stay silent on the issue. The federal rules that do govern mortgage servicing, including RESPA, set no baseline interest requirement at all — the obligation exists only where a state has separately legislated it.

Where a state does require it, the amounts are modest but real, because the balances are small and the published rates are set by formula rather than by market competition. A $3,300 escrow balance at a 2.00% rate earns about $66 a year, while most homeowners in states without such a law receive $0. New York is the best-known example of the rule in practice: New York requires banks to pay at 2% interest on escrowed funds.

Whether that kind of state law can be enforced against nationally chartered banks is now a genuine circuit split rather than a settled question. The US Supreme Court gave homeowners another chance in 2024, unanimously throwing out an appeals court ruling that had sided with Bank of America's refusal to pay. Since that decision:

• The First Circuit has ruled that a similar Rhode Island law is not preempted for national banks.
• The Ninth Circuit has let California's requirement keep applying to national banks.
• The Second Circuit ruled in 2026 that federal law preempts New York's own law when the lender is a national bank.

The Office of the Comptroller of the Currency has stepped directly into the dispute too: a rule it proposed at the end of 2025 gives national banks discretion over whether to pay interest or other compensation on escrow accounts, and a companion preemption determination states that federal law overrides the interest-on-escrow laws of New York and at least eleven other states for national banks. A coalition of states is suing to block that determination.

A borrower at a nationally chartered bank in one of the states listed below should confirm directly with the servicer whether interest is currently being paid — whether the state law reaches that particular bank is still being litigated, and the answer currently differs by circuit.

Which US states require interest on mortgage escrow accounts?

Twelve states currently have laws on the books requiring lenders to pay interest on mortgage escrow balances held for property taxes and insurance: California, Connecticut, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Utah, Vermont, and Wisconsin, each under its own statute setting the rate and the accounts it covers. Two more states sometimes still appear on older lists of escrow-interest states: Iowa repealed its mandate in 2022, and New Hampshire's statute reaches only state-chartered institutions rather than acting as a general mandate on every lender, which is why current counts leave both off. A homeowner anywhere else on this list generally receives nothing on the money sitting in their escrow account, because there is no federal floor and no judge-made national standard filling the gap.

The rate and the method for calculating it differ by state and sometimes change year to year, so a borrower in one of the twelve states should check the current published minimum rather than assume it stays fixed. Maine, for example, requires a minimum 2.00% rate in 2025 on escrow accounts. Because the obligation runs against the lender or servicer directly rather than through a neutral third party, the homeowner typically sees it as a credit on an annual escrow statement rather than as a separate payment.

Who gets the interest on a lawyer's client trust account (IOLTA)?

Interest earned on a lawyer's pooled client trust account — the kind used to hold small retainers, short-term deposits, or earnest money a law firm is managing on a client's behalf — goes to a state-run legal aid program, not to the lawyer and not to the client whose money generated it. An IOLTA account is a pooled trust account holding unearned client funds, such as retainers and settlement proceeds, separate from a firm's operating account, with interest going to state legal aid programs rather than the lawyer or client. The mechanism is automatic from the depositor's point of view: the interest earned on a firm's IOLTA account is not the firm's money, and because it was generated by client funds, it must be transferred to the state's IOLTA program in the ways set forth by that state's bar association.

Not every dollar a lawyer holds goes through this pooled arrangement, though. Nominal or short-term funds belong in a pooled IOLTA, while larger or longer-held client funds typically warrant a separate interest-bearing trust account so the client directly benefits from the interest. In practice this means a $3,000 retainer held for a couple of months earns the client nothing directly — at a 2% annual rate held for 60 days, that balance would generate only about $9.86 in interest, an amount too small to justify the paperwork of a dedicated account — while a $500,000 settlement a law firm is asked to hold for eight months would typically be moved into its own interest-bearing account so the client, not a legal aid fund, collects what it earns.

Why does interest on small, short-term escrow deposits go to legal aid instead of the client?

Interest on pooled, nominal, or short-term client deposits is redirected to legal aid because the legal reasoning behind IOLTA treats that interest as money the client could never have collected anyway, once the cost of administering an individual account is taken into account. The US Supreme Court settled the underlying constitutional question in Brown v. Legal Foundation of Washington, upholding IOLTA programs on the reasoning that they only hold funds that couldn't earn the client any net interest after costs — so the client loses nothing.

In practical terms: the bank fee and administrative work needed to open, track, and close a separate interest-bearing account for a $3,000 retainer held for two months would exceed the handful of dollars that account would earn. No individual client account could ever generate positive net interest for the client in the first place.

Once that premise holds, pooling those deposits across an entire state bar turns a sum nobody could use individually into something substantial collectively. Individual client deposits are too small to earn meaningful interest on their own, but pooled balances generate meaningful interest: a firm's average trust account balance, combined with thousands of other attorneys' balances, creates millions in collective interest statewide. That collective total funds real programs: in 2020 alone, IOLTA programs nationwide generated over $175 million for civil legal services. The flip side of the same reasoning explains why large or long-held deposits are treated differently: once a balance is big enough or held long enough that a dedicated interest-bearing account would clearly out-earn its own administrative cost, the justification for pooling disappears, and ethics rules require the money be placed where the individual client, not a legal aid fund, receives what it earns.

Who gets the interest on an M&A indemnification escrow?

Interest on an M&A indemnification escrow is typically paid to the seller along with the principal when the escrow releases, though the point is negotiated and spelled out explicitly in the escrow agreement rather than left to a general rule. In most transactions, escrow funds are invested in low-risk instruments, and the interest earned is typically paid to the seller upon release, although this is negotiable. A model negotiation checklist used by deal counsel confirms sellers routinely push for this in writing: a seller-favorable position is to ensure interest and other income earned on the escrow amount are added to the escrow funds and available for claims, while also being distributed to the seller at the end of the escrow period, rather than retained by the buyer or escrow agent as a quiet windfall.

The amounts involved scale with how much is escrowed and for how long. In most M&A transactions, 10% to 20% of the purchase price is withheld in a third-party escrow account to fulfill post-closing indemnification obligations, typically for 12 to 24 months. Take a $10 million sale with a 15% indemnification escrow, or $1.5 million, invested in a low-risk instrument yielding 4% annually. Held for the full 18-month survival period that is typical for this kind of deal, that escrow earns $1.5 million × 4% × 1.5 years, or $90,000, on top of the principal the seller eventually collects — money that exists purely because of how long the funds sat, not because of anything either party did differently.

Not every dollar held back in an M&A deal sits in this kind of interest-bearing, third-party arrangement. A separate working-capital true-up or an earn-out holdback can instead be retained directly by the buyer rather than deposited with an escrow agent, and while most escrow agreements provide for interest accrual to the seller's benefit, paid out with principal at release, sellers should confirm interest provisions in the specific escrow agreement rather than assume every holdback on the cap table behaves the same way.

How is interest earned on escrow money taxed?

Interest earned in escrow is taxable income to whoever is treated as the owner of the escrow for tax purposes — and that owner is not always the party who eventually banks the cash. In M&A deals, buyers may receive a 1099-INT for interest credited to the escrow account during the escrow period and may need to report it, even when the seller is the one who ultimately receives the interest when the escrow releases.

Deal lawyers typically fix who actually bears that tax cost in the agreement itself. A standard negotiating position specifies that the seller is treated as the owner of the escrow for tax purposes, so that any tax on the escrow's income is the seller's responsibility — avoiding a mismatch between who gets the 1099 and who owes the tax.

Because of how the mechanics net out, the IRS treatment generally leaves the buyer tax-neutral regardless: the buyer may have to pay tax on interest credited to the escrow account, but at the end of the escrow period the buyer gets a tax deduction for the proceeds paid to the seller. Aside from a timing difference, the net tax to the buyer on escrow interest should be zero.

For a residential earnest money deposit, the threshold that matters is $600. The party receiving the interest must complete a W-9 for the escrow or closing company once that threshold is crossed, and the escrow or closing company issuing the 1099-INT is the one who tracks the running total, not the buyer or seller.

On the lawyer's trust account side, the picture is simpler because the money never belongs to the client or the firm in the first place: no one pays any taxes on the interest earned on IOLTA accounts, because the IRS has ruled that the interest generated on these accounts is not taxable to the client, the lawyer, or the firm.

How do you find out whether your escrowed money is earning interest, and who gets it?

Finding out who is entitled to escrow interest is a document and a phone call, not a guess, and the order below works whether the money is earnest money, a mortgage escrow, a trust account deposit, or an M&A holdback.

How do you make sure your contract controls who gets the escrow interest?

The only reliable way to control who gets escrow interest is to put it in writing before the money is deposited, because every default described in this article only applies in the absence of a clear instruction to the contrary. What that means depends on which kind of escrow is involved:

• Real estate deal. Confirm the escrow instructions name an interest-bearing account if the amount and holding period justify it, and state explicitly who receives that interest if the deal falls through partway through.
• Mortgage escrow. Check the servicing agreement and the applicable state law rather than assuming a standard federal baseline applies, since there isn't one.
• Lawyer's trust account. Ask whether a given deposit is large or long enough to warrant its own interest-bearing account rather than the pooled IOLTA default — the lawyer is required to make that decision, but a client who asks early can influence it.
• M&A escrow. Negotiate the interest clause with the same attention given to the indemnification cap or the survival period, specifying both who receives the interest at release and who is treated as the tax owner of the escrow along the way, so a buyer's 1099-INT and a seller's actual cash receipt do not end up assigned to two different parties with no clause reconciling them.

A payment structure that pays every party their share the moment a deal closes avoids this question for the portion of funds that never needs to sit in escrow at all. Shaka is a payment router: it takes the total amount of a deal and pays every party their agreed share in one transaction, without holding the funds at any point in between. Each recipient can sign off on their share before the client pays, the client pays once, and every party is paid at the same moment the payment settles, onchain and final.

That does not replace an indemnification escrow meant to sit for 18 months against a warranty claim, or a mortgage servicer's tax-and-insurance account — those still need a holding period, and the question of who gets the interest still applies to them. But for the deposit, deal proceeds, or professional fee that does not need to be held at all, routing the full amount directly to each party at closing removes the interest-ownership question entirely, because there is no balance sitting anywhere long enough to generate interest for anyone to argue about.