All you need to know about Zakat on property

It’s Ramazan and Zakat time is just around the corner for most of the people. Zakat being an obligation on all Muslims who possess enough wealth in reserve, can offer a bit of a conundrum to realtors, hardcore real estate businessmen, or even casual investors.

Is Zakat payable on real estate at all? On what kind of property is it payable? Is it applicable on rental property? This blog tries to answer all of these questions. So if you have any stakes in real estate, read on!

ZAKAT: WHERE NOT APPLICABLE ON PROPERTY

It will be convenient to divide the property into two types for the purpose of Zakat calculation. There’s the property you buy for personal use and the property you buy as direct investment. So basically, Zakat on real estate – like so many things in Islam – basically depends on your intentions.

1. Are you buying the property to farm on it or make other agricultural use of it?
2. Are you buying the land or property to construct your home on it?
3. Are you buying it to set up any other form of business?

Zakat will not be applicable on your property in such a case.

It doesn’t matter how you use the property, as long as you are earning some income through that business, you will not pay Zakat on the property where you are conducting that business. On the other hand, you will have to pay Zakat on the income produced through that business – if, and only if, the income constitutes the nisab, the minimum amount a Muslim must have before Zakat becomes applicable on him.

ZAKAT: WHEN APPLICABLE ON PROPERTY

A general consensus exists among different denominations about the land on which Zakat is applicable. For example, here is the fatwa on the matter by the Permanent Committee for Research and Fatwas of Saudi Arabia, headed by Shaykh Abdul-Azeez ibn Baaz:

“If you have prepared it for sale, then you are required to pay Zakaat on it for the years that have passed, based on its value at the end of each year.  Then, you must continue to pay Zakaat on it at the end of each year (of ownership).

If you are planning to build a house for yourself on it, there is no Zakaat due upon it.

If you are planning to build a house on it to rent it to others, then you are to pay Zakaat from the rent that you earn from it, after you’ve saved it for a year if it remains above the nisaab, whether by itself or mixed in with the rest of your (saved, zakaatable) wealth.

If you are planning to build a farm on it, then once it is built, you must pay Zakaat on your harvests of seeds and fruits, according to what is well known about the Zakaat due on harvests of seeds and fruits.”

So, Zakat is applicable on the following kinds of land:

1. Land you purchased to sell on profit later.

In such case, you will have to pay 2.5% of the value of the property at the end of each year. For example, if you have purchased land worth PKR 8 million and you hold it for a year, and its value is now PKR 10 million. You will pay Zakat worth PKR 250,000.

If you are buying land on instalments, then Zakat payable will be payable only on the amount you have paid so far. For example, a plot’s total cost is PKR 8 million, but you have only paid 4 million on it on instalments so far. The Zakat applicable on it will be PKR 100,000.

2. Land you purchased to build a house/flat to rent will be paid from rental income

If you have bought land to construct a house, for example, and you plan to rent the house out, you will have to pay Zakat on the rental income. You will pay Zakat on rental income if you save it for a year and it, along with the rest of your savings, forms nisab.

We hope this will help you in deciding your Zakat this year. If you have any questions on the matter, you can talk to us in the comments section.