23rd Safar 1444AH
Assalamu alaykum warahmatullahi wabarakaatuh!
“The parable of those who spend their wealth in the way of Allah is that of a grain of corn; it grows seven ears, and each ear has a hundred grains. Allah gives manifold increase to whom He Pleases.” (Q 2:261)
“Truly, to a happy state shall attain the believers, who humble themselves in their prayer, and who turn way from all that is frivolous, and who fulfill their Zakah duty.” (Q 23:1-4)
In continuation of our discussions on Zakah, we shall be looking at the Zakah on investment properties. Investment properties are fixed assets (Non-Current assets, in the language of the accountants) like land and buildings which are used for income generation.
Land typically consists of agricultural land, land used for building private residential buildings and land used for commercial buildings like shopping malls, rented apartments and toll-collecting amusement parks, etc.
All properties, in whatever form, are subject to Zakah if the acquisition intention is for rent/income and capital appreciation.
Property for personal use
No Zakah is payable on your house nor on any private property or goods which are for your own personal use. The Prophet (SAW) said, “There is no Zakah owed by the Muslim on his slaves or horses.”
If you inherit or are given any property on which Zakah has already been paid, and then sell any of it, no Zakah is due on the proceeds until a year has elapsed. Land which has been acquired by way of a gift or inheritance is not zakatable if you simply own it with no clear intention about what to do with it.
Zakah on Assets Rented Out
Some scholars view that rental properties are not subject to Zakah.
In other words, at the end of the year, you look at the market value of the property, add other Zakatable assets that you have such as money and stocks, etc., and then calculate Zakah at 2.5%.
You should make your choice from any of these opinions, but your choice should be based on the way you feel in your heart and God-consciousness and piety.
In modern times, almost everything is available on rent or lease. Land, building, house, shop, machinery, factory, motor car, electronics like TV or refrigerator, furniture, clothes, ornaments, etc. are available for hire. There is almost a consensus among the scholars that Zakah should be levied on such assets.
However, the problem is how to levy Zakah, whether it should be levied on the value of the assets or on the rental or lease money? There is a difference of opinion on this issue. Some say that Zakah should be levied on the value of the asset, but many of the jurists favour the idea of charging Zakah on the rentals. Their opinion is that the asset itself is a factor of production and it should be exempted from Zakah as agricultural land being a factor of production is exempted. But the rent or lease money received from it should be subjected to Zakah as produce from agricultural land is subjected to Zakah.
Then arises the question of Nisab. On this question also many of the jurists say that Nisab of silver would apply. If the rent received by letting out, e.g., a house or a shop, in a year comes up to price of 595g of silver (as at 7th Sept. 2022) in the sum of N170,000 (per official CBN rate) or N276,000 (at parallel market rate) or exceeds it, then Zakah would be levied thereon.
Imam Ahmad (RA) is reported to have said that zakah is obligated on the rent of rented houses whenever the rent is received. This is quoted by Ibn Qudamah. In the writings of the Malikites, Zarruq states in Sharh al Risalah that “There are two opinions on the Zakatability of assets used for income, such as rental housing. One, zakah is due on their value received when sold, and two, zakah is due on their income when it is acquired.”
Some jurists say that the rate of Zakah on gross rental receipts should be 10 percent because the asset is being exempted from Zakah like agricultural land and rent is being charged to Zakah as agricultural produce. But many jurists suggest a rather very lenient treatment. According to them Zakah should be imposed at the normal rate of 2.5% and that too on the amount which is saved out of the rent at the end of the year and not on gross rental receipts.
Scholars are not agreed on the Zakah rate and the base amount (gross rent or saved rent); some say it is 10% (like the nisab on agricultural land), others say it is 5% (still using the rating agricultural land using irrigation which have additional cost) and yet some go for 2.5% explaining that rental property, being an investment asset, is more similar to the capital of traders or merchants. Livestock are also similar to rental assets because the Arabs used to hold livestock as an investment capital.
In the absence of a consensus rate, you are free to pitch your tent with any of the scholars. In our view, the rate of Zakah must be calculated on the value of the asset itself plus any amount of the rent left at the end of the Lunar year (after payment of all expenses of the property itself and of family expenses) and the rate would be 2.5%. Wallahu a’lam (Allah knows best).
You should make your choice from any of these opinions, but your choice should be based on the way you feel in your heart and God-consciousness and piety.
Land Speculation
Land may also be bought for investment purposes speculatively such that when the price appreciates it is sold for profit. In this situation, Zakah is due on the approximate sale price of the land every year, on the Zakah anniversary. This means that the land needs to be valued each year to see if its value has increased, depreciated or remains the same. It’s always important to check to ensure that you do not over – or underpay. You can delay the payment for each year for the time when the land is actually sold. When the payment is to be made, it will be upon the notional amounts earlier calculated and suspended for the previous years and upon the current sale price.
Leasehold Properties
As a way of acquiring properties without putting down the total capital cost, people enter into Lease contracts where they pay an initial deposit followed by regular monthly or other periodic rentals over an agreed timeline for the property to become theirs. During the period of the lease, the property right resides with the Lessor while the Lessee is on a leasehold right.
If one has purchased a leasehold, it is fair to assume that it has been purchased either to live in or to rent out and not with the prime intention of resale with capital appreciation. If this is correct, then only whatever is left over from one’s rental income on one’s Zakat anniversary needs to be considered.
Properties Acquired Via Mortgages
There is no Zakah on owner-occupied (not-for-rent) mortgage property as it is an essential need of human existence. The mortgage liabilities are separated into current (the amount due in the short term, within one year) and long (amount falling due after one year) terms. The current term portion is assessed after the finance cost (interest element) is separated to be allowed for deduction against other assets for Zakah determination. The long-term portion of the loan is disallowed. This allowance should only be taken if one feels that not doing so significantly impacts one’s ability to make the repayments in a timely fashion. If it is an Islamic home purchase plan then these are not considered to be debt and therefore nothing is deductible.
With rental property, the only thing to worry about is whatever is left over from the income that has been generated over the course of the year. So, in fact, as long as you have accounted for the remaining cash from your rental income in your cash balance, there is nothing further to consider. Capital repayments, service charge, expenses etc., that are upcoming will simply reflect in next year’s cash balance on your Zakat anniversary, i.e., the fact that you will have made those expenditures will mean that your cash balance will be lower and therefore that will factor into your Zakat calculation.
I ask Allah to make this presentation beneficial to me and all the readers, especially those who are eager to know their responsibilities with regard to Zakah obligation. May Allah remove miserliness and fear of poverty from our hearts so that no matter the amount of wealth that we possess, we are ready to willingly submit it to full Zakah assessment.
I ask Allah to make us be of those who will rejoice on the Day of Reckoning as “Allah is well pleased with them, and they are well pleased with Him” (Q58:22) and also that “Their Lord gives them good news of mercy from Him, good pleasure, and Gardens [of Paradise] in which they shall have lasting bliss” (Q9:21). Allahumma Aaamiiin!
Alhamdu Lillahi Rabbil A’lameen
Suleiman Zubair
