Encumbrance

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DEFINITION of 'Encumbrance'

A claim against a property by another party. Encumbrance usually impacts the transferability of the property and can restrict its free use until the encumberance is removed. The most common instances of an encumbrance occurs in real estate such as an outstanding mortgage or unpaid property taxes. However, encumbrance can also be used in an accounting context to refer to restricted funds inside an account that are to be used only for a specific liability.

BREAKING DOWN 'Encumbrance'

In real estate, if the property has an encumbrance on its title, this will affect the transferability of the title to another party. Encumbrances can also affect property other than real estate such as car titles. With respect to encumbrance accounting, the presence of an encumbrance can give the illusion that there are more available funds inside an account than is actually free for use. In both cases, it is best to understand the details and implications of an encumbrance before engaging in any transaction.

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RELATED FAQS
  1. What is the difference between a lien and an encumbrance?

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