Zakat on Property: Its Types and How to Calculate it

Zakat is one of the five pillars of Islam and is an obligation for every eligible Muslim who possesses wealth above a certain threshold known as Nisab.

 

It is a form of charity that Muslims are obliged to pay to the less fortunate members of society. 

Note that zakat should be paid annually, based on the Islamic lunar calendar. Many Muslims choose to pay their zakat during the month of Ramadan but it can be paid at any time throughout the year.

 

Most people are aware of zakat on money and gold whereas many are not familiar with zakat on property, which is equally important. Moreover, Zakat and Property Tax are two different terms which shouldn’t be mixed. 

It is crucial to understand the specific criteria for each type of property to calculate zakat accurately.

 

In this piece of writing, we will involve in the concept of zakat on the property, its types, and how it is calculated. 

We will also discuss the different scenarios in which zakat on the property is applicable, including zakat on rental, investment, land, and commercial property.

Importance of Zakat 

Islam has made it compulsory for Muslims to give out a part of their land wealth to the needy according to Nisab and Shariah. It also turns out to be the cause of Barkat in their money. 

This can be seen in the translation of Hadith given below:

 

“Allah has made it obligatory for them to pay the Zakat from their property and it is to be taken from the wealthy among them and given to the poor."

Sahih al-Bukhari 1396

In Book Reference: Vol 2, Book 24, Hadith 479

Zakat on Property, Nisab and its Calculation

Zakat on a property applies to all forms of immovable assets, including houses, commercial properties, land, rental properties, and investment properties. 

 

The Zakat on a property is due if the total value of these assets exceeds the Nisab, which is currently set at 87.48 grams of gold or its cash equivalent.

It is important to note that zakat on the property does not apply to personal assets, such as the house you live in or the car you drive, but rather to properties that are held for investment or commercial purposes.

Types of Zakat Applicable on Property

There are two types of zakat on property, namely Zakat on Rental Property and Zakat on Investment Property.

Zakat on Rental Property

Zakat on a rental property applies to those who earn rental income from their property. In the Hanafi school of thought, zakat on a rental property Hanafi is calculated as 2.5% of the net rental income. 

 

This means that if you earn 10,000 in rental income over a year and your expenses, such as property taxes, maintenance, and repairs, amount to 3,000. The net rental income would be 7,000. 

Therefore, the zakat on the rental property would be 175 (2.5% of 7,000).

It is important to note that zakat on a rental property is only applicable if the net rental income is above the Nisab. If your net rental income is below the Nisab threshold, then zakat on a rental property is not due.

Zakat on Investment Property

Zakat on investment property applies to those who own properties that are held for investment purposes, such as rental properties, land, and commercial properties. 

In this case, zakat on investment property is calculated as 2.5% of the market value of the property.

For example, if you own a rental property that is worth 500,000, the zakat on investment property would be 12,500 (2.5% of 500,000). It is important to note that zakat on investment property is only applicable if the market value of the property is above the Nisab.

Zakat on Land Property

Zakat on land property applies to those who own undeveloped land that is kept for investment purposes. In this case, zakat on a land property is calculated as 2.5% of the market value of the land.

For example, if you own a piece of land that is worth 100,000, the zakat on the land property would be 2,500 (2.5% of 100,000). 

It is important to note that zakat on the land property is only applicable if the market value of the land is above the Nisab.

Zakat on Commercial Property

Zakat on commercial property applies to those who own commercial properties kept for investment purposes. In this case, zakat on commercial property is calculated as 2.5% of the market value of the property. 

Commercial properties include office buildings, shopping centers, and warehouses, among others.

Calculating Zakat on Rental Property with Mortgage

If you own a rental property with a mortgage, the calculation of zakat on rental property becomes a bit more complicated. In this case, zakat on a rental property is calculated as: 

 

2.5% of the net rental income - mortgage payment = zakat amount

 

It is important to note that you cannot deduct the entire mortgage payment from the net rental income. Only the portion that represents the principal payment can be deducted. The interest portion of the mortgage payment is not deductible for zakat purposes.

Zakat on Installment Property

Zakat on installment property applies to those who have purchased a property through an installment plan. In this case, zakat on a plot on installment property is calculated as 2.5% of the equity in the property.

Zakat on House Property

Zakat on house property applies to those who own a house that is held for investment purposes, such as a rental property. In this case, the zakat on a house property is calculated using the same method as the zakat on an investment property.

For example, if you own a rental house that is worth 300,000 the zakat on the house property would be 7,500 (2.5% of 300,000).

Zakat on House Rent

Zakat on house rent applies to those who receive rental income from their property. As mentioned earlier, zakat on a rental property is calculated as 2.5% of the net rental income.

For example, if you receive 1,000 in rent per month, and your expenses, such as property taxes, maintenance, and repairs, amount to 300 per month. Then your net rental income would be 700 per month. 

Therefore, the zakat on house rent would be 21 (2.5% of 700).

Zakat on Real Estate

Zakat on real estate applies to all forms of immovable assets, including houses, commercial properties, land, and rental properties. The Zakat on real estate is calculated based on the type of property and the value of the property, as explained earlier.

Zakat on Immovable Property

Zakat on immovable property is applicable to all forms of immovable assets, including houses, commercial properties, land, and rental properties. The Zakat on immovable property is calculated based on the type of property and the value of the property, as explained earlier.

Conclusion Hereby!

Zakat on the property is an important obligation for eligible Muslims who possess wealth above the Nisab. It is applicable to all forms of immovable assets held for investment or commercial purposes. 

 

There are different types of zakat on the property, including zakat on a rental property, investment property, land property, and commercial property, each calculated differently. 

It is also recommended to consult with a qualified Islamic scholar or financial advisor when calculating zakat, especially when it comes to complex assets such as rental properties with mortgages or installment plans. They can provide guidance and ensure that zakat is calculated correctly according to Islamic principles.

 

In addition to fulfilling the obligation of zakat, Muslims are encouraged to be charitable throughout the year and to give in the way of Allah as much as they are able. This can include giving voluntary charity, known as Sadaqah, in addition to zakat. 

By giving generously and supporting those in need, Muslims can help build stronger communities and fulfil their obligations to ALLAH.