Zakat on Real Estate

Brief Overview: Importance of Zakat

Zakat is the third pillar out of the 5 pillars of Islam. When we look into the Quran, we find that Allah has linked the command of performing prayer and paying Zakat in over 20 places. One of the wisdoms behind this is to emphasize the importance of paying Zakat. Just as Prayer is a fundamental part of our faith, so is Zakat. Those that are negligent of this responsibility are deemed as having committed a major sin in the sight of Allah (SWT).

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Allah’s Messenger (Allah’s blessings and salutations upon him) said, “Whoever is made wealthy by Allah and does not pay the Zakat of his wealth, then on the Day of Resurrection his wealth will be made like a bald-headed poisonous male snake with two black spots over the eyes. The snake will encircle his neck and bite his cheeks and say, ‘I am your wealth, I am your treasure.’ “ Then the Prophet recited the verses: “Those who withhold what God has given them of His bounty should not assume that is good for them. In fact, it is bad for them. They will be encircled by their hoardings on the Day of Resurrection. To God belongs the inheritance of the heavens and the earth, and God is well acquainted with what you do.” (3:180). - (Ṣaḥīḥ al-Bukhārī)

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This verse of the Quran and the authentic Hadith inform us of the heinous crime committed when not paying one’s Zakat. For this reason, it is critical to not only pay Zakat, but to also be accurate and diligent in calculating one’s wealth to ensure all Zakat due is correctly discharged.

1.0 Diligence in Calculating Zakat

When taking Zakat calculations into consideration, we tend to often forget the importance of accurately calculating the amount owed or the zakatable net worth. It may seem tedious, but money that is to be paid in Zakat is not permissible to horde or retain for a wealthy person and even a dollar uncounted for is a dollar impermissible to keep.

For example, when calculating properties, land, and real estate, there are many factors to include such as:

• Debts
• Mortgages
• Rent
• Building costs
• Deposits

There can be more factors, depending on the circumstance.

For this reason, we will explain in detail the rulings regarding all applicable parts of real estate for Zakat purposes.

2.0 Residential Properties: Definition & Rulings

Personal Residence

A personal residence is a property which is inhabited and occupied by a person for their own personal living. This is the type of property that falls under the category of personal assets and therefore will not be zakatable. As such, the property value is not subject to Zakat nor the equity held on the property.

Rental Property

A rental property is a property or unit owned which is not a personal residence, rather a property rented out. If a property is rented out or a portion of it is rented out, Zakat will only be applicable on the amount of rent that has been retained after one lunar year. The actual value of the property is not subject to Zakat.

Purchase for resale

A property that was purchased with the intent to sell will be zakatable. Such an intention will render the property to fall under the definition of a business commodity and will be zakatable even if it has been sold immediately or will be in the future.

3.0 Land Types: Definition and Rulings

Farming land

Zakat is not applicable on land which is utilized for a purpose unless the land itself is being bought and sold as a commodity.

Therefore, agriculture land (ALR) which is owned is not zakatable, unless it was purchased for selling. The produce and production, however, is zakatable. This means fruits, vegetables, and cattle will be zakatable, even though the land is not. If the land is leased then the money retained after one lunar year will be treated as cash and will be zakatable.

Bare Land

Bare land can be understood as vacant or cleared land. If a piece of land is bare and does not contain a residence nor produce like in the case of agriculture land, it will not be zakatable.

Leased land

If any type of land is leased, regardless of the purpose, only the rent will be zakatable. All rent collected after expenses at the end of one lunar year will be zakatable.

Construction Land

Any land that is owned for the purpose of constructing a building on, subdividing into multiple lots, or consolidating into fewer lots is zakatable since this falls under a business transaction. However, if a property was being built for one’s personal residence, then it would not be zakatable.

4.0 Commercial Property: Definition and Rulings

Commercial Leasing

Commercial property is not zakatable. However, if the building is leased or sub-leased the rent from the lease will be zakatable and considered as cash after one lunar year.

Commercial Selling

If a commercial property is being sold, then it will be zakatable. This is because all commercial properties are for business purposes and will be considered as a commodity when the intent is to sell. This means that whether the property is sold immediately or in the distant future, will remain zakatable.

5.0 Debt & Liabilities

When purchasing property, there are many factors to keep in mind for Zakat purposes. Since properties come with many types of financing structures and other debts, it is essential to recognize which debts and liabilities can be deducted from one’s Zakat, how much can be deducted, and what cannot be deducted. The following examples are common and necessary to understand when calculating Zakat on property and land.

Deductible Liabilities

A deductible liability is defined as a loan that is required to be paid within one lunar year. This means that if the loan is short term and paid within one year, then the entire amount can be deducted from the zakatable net worth. With that being said, if the loan is a long-term debt and not expected to be paid until one year, then it will not be deducted from the zakatable net worth. However, in the case of a long-term debt which required a portion to be paid within one year, such as a mortgage or amortized debt, then the principal amount paid within one year may be deducted.

Non-Deductible Debts

A non-deductible debt is defined as a debt that cannot be deducted from one’s zakatable net worth. These are any debt that is expected to be paid after one year. In this case, the debt will not be deducted from the zakatable net worth. Similarly, any haram debt payment, such as the interest in a mortgage or amortized loan, cannot be deducted, even if paid within one year.

6.0 Miscellaneous Issues

There are some other financial issues that are interconnected with properties and land that are necessary to understand for Zakat purposes. Here are some of the following points to note when dealing with real estate and Zakat.

Assignment profits

An assignment profit is when a property is purchased, but has not yet closed and rather it is resold for a profit prior to closing and officially owning the property. In such a case, regardless of the original intent of purchasing the property, it will be zakatable. The money made from an assignment will be considered a business transaction. Zakat will be applicable to this amount of profit after deducting the applicable taxes to the profits and possible capital gains.

Balance Amounts Required in Closings

If a person has purchased a property and provided a deposit to a firm contract, is awaiting the completion of the property and during this time has not reached their Zakat anniversary, the following rules will apply:

• Since a deposit has been given, but the down payment balance will remain to be provided until the closing date, this amount of wealth will not be zakatable for the time being. This is because the remaining down payment will be paid within one year and can be considered as a debt payable and therefore fully deductible from one’s zakatable wealth.

• Similarly, any taxes that are required to be paid in the purchase of the property can also be deducted in the meantime, since it will also be required to be paid within one year.

• All lawyer fees, inspection fees, and other service fees cannot be deducted as these are not debts; rather they are future expenses.

Intentions

All actions are based on their intentions. Therefore, all items owned may or may not be zakatable based on the intention.

In essence, only the following categories are zakatable:

• Gold and silver
• Cash
• Merchandise
• Agricultural produce
• Animals and livestock

With this in mind, we understand that land and property itself is not subject to Zakat unless it becomes a business or a commodity of trade and thus, we have described each situation in detail to define what is and what is not zakatable.

As for intention the following is primitive in distinguishing Zakat:

• Intention to use personally: Non-zakatable.
• Intention to rent: Non-zakatable; only rent is zakatable since it is treated as cash.
• Explicit intention to purchase and sell: Zakatable and treated as a commodity.
• Conditional intention: Non-zakatable until and unless sold for business.

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