4.1 DC Escrow and Trust Account Requirements
Key Takeaways
- Entrusted funds must be deposited within 7 days into a separate, FDIC-insured account located within DC (D.C. Code § 42-1704)
- The escrow holder must notify the Commission within 14 days of opening the account and authorize examination of the records
- Commingling (mixing) and conversion (unauthorized use) of client funds are strictly prohibited; a broker may take no part of the funds until the deal is consummated or terminated
- Disputed earnest money stays in escrow until a written release signed by both parties or a court order; the broker may interplead into court
- Funds held 90 days or more earn interest from the 91st day, with a maximum $15 service fee deductible
DC Escrow and Trust Account Requirements
Mishandling other people's money is the fastest way to lose a DC license, so the state portion tests escrow rules in detail and they are governed by D.C. Code § 42-1704 and Title 17 DCMR. Section § 42-1702 defines "escrow funds" as earnest-money deposits for the purchase of residential or commercial property and security deposits for the rental of residential or commercial property.
What a Trust/Escrow Account Holds
A trust (escrow) account is a dedicated bank account in which a broker holds funds that belong to others, never the broker's own operating money.
| Fund Type | Example |
|---|---|
| Earnest-money deposits | Buyer's good-faith deposit on a sale |
| Security deposits | Tenant deposits on rentals |
| Rent collections | Rent received for a landlord client |
| Closing proceeds | Funds awaiting disbursement at settlement |
Where the Account Must Be
| Requirement | Rule |
|---|---|
| Location | A financial institution located within the District of Columbia |
| Insurance | Deposits insured by the FDIC (or FSLIC / successor) |
| Segregation | A separate account for money belonging to others — never the personal or business operating account |
Deposit Timeline (the 7-Day Rule)
| Situation | Deadline |
|---|---|
| Standard | Within 7 days of receipt |
| Signed written instructions differ | Follow those instructions |
| No instructions | 7-day rule applies |
Key Rule: Absent written instructions to the contrary signed by all parties, entrusted funds must reach the escrow account within 7 days of the broker's receipt.
Notify the Commission (14-Day Rule)
Each escrow holder or trustee must notify the DC Real Estate Commission within 14 days of establishing the account and must give the Commission written authorization to examine the escrow/trust accounts and the related books, records, and contracts.
| Information Reported |
|---|
| Name of the financial institution |
| Address of the institution |
| Name of the account |
| Account number |
This examination authorization is what lets DCREC conduct trust-account audits — a power emphasized in the Commission's enforcement role.
Prohibited Practices
Commingling vs. Conversion
| Term | Definition | Status |
|---|---|---|
| Commingling | Mixing client funds with the broker's personal or business funds | Prohibited |
| Conversion | Using client funds for an unauthorized purpose (theft) | Prohibited; may be criminal |
A small nominal amount of the broker's own money to keep the account open or cover bank fees is generally tolerated; depositing client money in a personal account, or paying business expenses out of escrow, is not.
Early Access to Funds
An escrow holder or trustee is NOT entitled to any part of the earnest money or other entrusted funds — including a commission — until the transaction has been consummated or terminated.
Critical: A broker cannot "borrow" or pre-pay commission from escrow before closing. Doing so is conversion even if the broker intends to repay it.
Handling Disputed Funds
When buyer and seller disagree over who gets the earnest money, the broker must not simply pick a side:
- Hold the disputed funds in escrow until receiving a written release signed by both buyer and seller directing disbursement; or
- If a civil action is filed, the broker may pay the funds into court (interplead) or hold them until the court orders disbursement.
Worked scenario: A buyer cancels after the inspection deadline and demands the $20,000 deposit back; the seller insists the buyer breached. The broker keeps the $20,000 in escrow and waits for a signed mutual release or a court order — releasing it unilaterally to either party is itself a violation.
Interest on Escrow Funds (91st-Day Rule)
| Trigger | Rule |
|---|---|
| Held 90 days or more | Funds earn interest from the 91st day until consummation or termination |
| Rate | Highest of the legal maximum federal savings rate, the account rate, or the CD rate |
| Service fee | A maximum $15 service fee may be deducted |
Record-Keeping and Audits
Brokers must keep complete trust records — monthly bank statements, deposit and disbursement records, individual client ledgers, and transaction files — reconciled regularly, and available for Commission examination. Records should be retained for the period the Commission specifies (commonly cited as 3 years). Sloppy or missing records are themselves a disciplinable trust-account violation, independent of whether any money is actually missing.
| Memorize | Number |
|---|---|
| Deposit deadline | 7 days |
| Notify Commission | 14 days |
| Interest begins | 91st day (held 90+ days) |
| Max service fee | $15 |
Property-Management and Security-Deposit Trust Funds
The escrow rules reach beyond sales. A property manager who collects rent and tenant security deposits is holding escrow funds under § 42-1702 and must observe the same segregation and record-keeping duties.
| Fund | Trust Handling |
|---|---|
| Rent collected for an owner | Held/disbursed per the management agreement; not the manager's money until earned |
| Security deposits | Maximum one month's rent, held in an interest-bearing DC account, interest paid to the tenant |
| Application fees | Must reflect actual cost; not a slush fund for the broker |
Worked scenario: A property manager deposits a tenant's $1,800 security deposit into the firm's operating account "temporarily" to cover payroll, intending to move it next week. That is conversion the moment the funds are used — intent to repay is no defense, and it can support both Commission discipline and a Guaranty Fund claim.
Reconcile the trust account against client ledgers monthly so that the total of all individual client balances always equals the bank balance (a "three-way reconciliation"). An out-of-balance trust account is a red flag that triggers a Commission audit using the examination authorization the broker filed at account opening.
Within how many days must client funds be deposited into a DC escrow account (absent contrary written instructions)?
Within how many days must a DC licensee notify the Commission after opening an escrow/trust account?
A buyer and seller are fighting over a $20,000 earnest-money deposit. What must the DC broker holding the funds do?
When must interest be paid on escrow funds held in DC?