Real Estate Counts as Wealth or Not
Zakat is one of the Five Pillars of Islam. However, when it comes to Zakat on real estate, we need to understand the purpose for which this “real estate” is bought for.
In other words, the basic guideline states that real estate is not wealth that is subject to Zakat, meaning, Zakat is not due on it unless it is bought for trade; then and only then will it be subject to Zakat.
In general, all the capital assets which generate income are subjected to Zakat. Here comes the importance of defining your intention when buying real estate.
Zakat is only applicable to certain types of properties. So if your buying intention was
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- For personal use: there is no Zakat due on the real estate a person bought with the intention to use it for family reasons or rent it, as long as the owner will not sell this property to earn capital gains.
- For investment property: here, paying Zakat is applicable to a property bought with the intention to sell it in the future and earn capital gains.
Due Date of Zakat on Real Estate
In Islam, Zakat is due once a Muslim completes one lunar year since they met the Nisab for Zakat. The Muslim’s liability towards Allah is to pay their Zakat money at the end of every lunar year.
As for real estate, if the property is for personal use, then there is no Zakat due on it. However, if the real estate is for investment, it will be treated as a trade, and Zakat is applicable. If the purpose of buying the property is to sell it in the future, you have to pay Zakat on it at the property’s fair market value each year. Zakat is applicable on the investment property at its fair market value of 2.5% annually.
Agricultural Land to Zakat Subjecting
When it comes to agricultural land, the basic guideline states that it is not subject to Zakat. It is the lands’ crops and fruits only that are subject to Zakat.
Based on what Zakariyya al-Ansari said:
“If he (the land owner) grows crops for personal use on land that he bought for the intention of trade, then each of them is subject to its own ruling. Zakat on specific crops must be given on the crops he grows, and Zakat on trade goods must be given for the land.”. __ Asna al-Matalib – 1/385.
Therefore, if a person buys a piece of land as a trade and decides to cultivate it until he sells it at a reasonable price, then the palm trees which bear fruit, and crops that grow and ripen, are then due to Zakat, which is payable on fruit and grains at a rate of 1/10. As for the land itself, he must pay Zakat on the value of the land, as they are both different types of dues and are both obligatory.
Zakah on Real Estate Acquired for Renting
According to the majority of Scholars, if any type of real estate (apartments, storage places, shops, hotels, or buildings) was prepared to be rented out, no zakat is due on these types of properties, rather it’s due on its generated income. Meaning; there is no zakat on its value as properties; rather, zakat is due on the rent money that is collected from it when one full lunar year has passed.
Zakat on Real Estate that is Not for Trade
Again, the critical factor for Zakat on real estate is to have a clear, firm intention that the person is buying this property for trade. Only then can we say Zakat is applicable on his property. However, If a person buys a property with no specific intention, then it is, for sure, not subject to Zakat.
Zakat on Mortgage Property
The key factor is intention. If the property under the mortgage is prepared in the first place for trade, then zakat is due to it. If the mortgaged property is not prepared for trading from the beginning, then there is no zakat due to it.
Based on what Shaykh Ibn Baz said:
“If you have prepared it for trade, but it is mortgaged, you must pay zakah on it. But if it is mortgaged and not prepared for trade; rather, it is mortgaged until you pay off what is due to the person with whom it is mortgaged, and once you pay them off, you either live in it or rent it out, then it is not subject to zakah.”. __Fatawa Nur ‘ala ad-Darb – 15/43.
Zakat on Real Estate Owned by Multiple Partners
According to the Islamic Fiqh Council, what matters in the real estate previously prepared for trading is the total value of the property, not the minimum threshold of each individual. So in the case of multiple partners, if the value of the real estate reaches the nisab (the minimum threshold), each partner must give zakat, even if his own share does not reach the nisab.
Zakat on Real Estate Endowed for Charitable Causes
The general principle of giving zakat is to be owned by a Muslim individual. Now, in the case of real estate, which is endowed for charitable causes, these properties in Islam are known as “Waqf,” which means a property is customed for the benefit of the poor and needy in Islamic society. These types of properties do not belong to any individual. Therefore, there is no zakat due to it.
FAQ
Is there Zakat Due on Land that is not Developed?
No. There is no Zakat on Land is not Developed
How do you Calculate Zakat on a Building?
You have to pay zakat for the money you receive from your building, which is 2.5% on the day you receive the money.
Is Zakat Applicable to Investment?
Zakat is due on the balance of the investment accounts, which is 2.5% at the end of the lunar year. Zakat is due on capital money only without interest.
Is there Zakat in the Plot?
There is no zakat on plots purchased to build houses for giving out on rent and earning income. But Zakat will be on the savings from the rental income just as any other income if the income exceeds the nisab criteria.