Is zakat applicable on land or rental property?

While we already know about Zakat on Gold and Cash, many want to know about Zakat on land, plot, rental, and investment property.

• 7 people who are not eligible to receive Zakat.

Zakat on Property

In order to understand the concept of the Zakat application, we have to understand the purpose for which it is bought.

• Investment Property: Zakat is applicable to a property bought with the intention to sell it in the future and earn capital gains.
• For Use: There is no Zakat on a property bought with the intention to use or rent it. The aim here is not to sell the property and earn capital gains.

Zakat on Land for Use

If you are buying a piece of land for use, there is no Zakat on it as the objective is not to sell it and earn profits. Some examples of pieces of land for use are;

1. Agricultural Land.
2. A plot bought with the intention to build your own house.
3. Land bought to build your shop/office.
4. A plot to build a house/shop/office and rent it out.

On the other hand, if the purpose of buying the land is to sell it in the future or build something on it and sell the house or shop, you have to pay Zakat on it at the fair market value of the property each year.

Zakat on Investment Property

On the other hand, Zakat is applicable on the investment property at its fair market value at 2.5% every year. Some examples of investment properties are;

• Agricultural land with the intention to sell.
• A plot is bought to earn capital gains.
• A shop/office/building was bought with the intention to sell and earn profits.

Zakat on Rental Property

If the real estate is bought or built with the intention to use such as a shop/house bought to earn rental and not with the purpose to sell, there is no Zakat on the property itself.

However, the Zakat is applicable to the rental income derived from the property.

Once the rental income is received, it becomes cash and you will pay Zakat on it along with other cash and assets you are holding on the day you calculate your Zakat.

Zakat on Rented Investment Property

If a person purchases a house/shop/office for investment purposes but rents it out for some time to sell it at a good price later, Zakat is payable on;

• the fair market value of the property each year +
• Rental Income.

Hence, it is clear that it is the intention for which the property is bought that determines the eligibility for Zakat.

When to pay Zakat?

Once you complete one year since you met the Nisab for Zakat, it is payable to you. Now it is your liability towards Allah.

• You should pay your Zakat as soon as possible.
• If you die without paying Zakat, you would be responsible for it on the day of judgment.
• In case you delay Zakat, make sure to write the amount to be paid in your will so that your legal heirs can pay it after your death.
• In case they decide not to pay it (as it is not their liability), you would be held responsible in front of Allah.

Source: Dr. Zakir Naik