An encumbrance is a claim against a property by a party that is not the owner, which can impact the transferability of the property and restrict its free use until it is lifted. Encumbrances can be classified in several ways, including financial or non-financial. Some common types of encumbrances include mortgages, easements, and property tax liens. Encumbrances can also apply to personal property, and the term is used in accounting to refer to restricted funds inside an account that are reserved for a specific liability.

Encumbrances are important in determining how much funds are available as a projected expense planning tool, and they allow organizations to recognize future commitments of resources prior to an actual expenditure. Encumbrances can be toggled on or off to reflect available balances, and report users can use this encumbrance indicator to evaluate their available balances and solvency concerns, at budget or fiscal year end.

In real estate, encumbrances can affect the value or marketability of a property, and some encumbrances can be more troublesome than others, like liens placed on a property that seek repayment of debt. A title search and title insurance are the best ways to learn if there are encumbrances on a property, and these tactics can also protect a homeowner from any reduction in the property’s value should it turn out that there’s an undiscovered encumbrance on the property.