Question Summary:
How and what will be my Zakat obligation on this property/rental income/outstanding loan?

Question Detail:

I have a question regarding Zakat on a property, the details are as follows:
1. I bought a ready residential villa in December 2013 in UAE (where I work and live). I do not live in this property and I live in another UAE city in a rented flat.
2. My intention at the time of purchase of this property was to keep it for some time on rental and to move in this property in the future. But now the intention has changed to selling the property after 3 years as I will be moving to Australia after 3 years.
3. The property is financed by an Islamic bank for AED 3,400,000 in December 2013 and the current outstanding loan is AED 3,350,000 as of March 2015.
4. I paid the Down Payment on property + Transfer fees and other charges of AED 843,000 in December 2013 at the time of purchasing the property, AED 500,000 paid from my savings and remaining AED 343,000 taken Islamic finance from bank (equal monthly installments of 7,146 for 48 months). Current outstanding on this personal loan as of March 2015 is 250,000.
5. The Property is currently rented out for AED 180,000 per annum (AED 15,000 per month) and the installment payable to the bank every month is AED 19,000. Hence I pay AED 4,000 on monthly basis out of my pocket on top of the rental income to meet the bank installments (i.e. no savings from rental income).
6. Current market value of property is approximately AED 3,900,000 if want to sell.
How and what will be my Zakat obligation on this property/rental income/outstanding loan.
Jazak Allah Khair.

Answer :

In the Name of Allah, the Most Gracious, the Most Merciful.
As-salāmu ‘alaykum wa-rahmatullāhi wa-barakātuh
You state you purchased a property without the intention of re-sale. You then changed your intention later to re-sell the property. You have taken out a loan with an Islamic Bank to fund a portion of the purchase price. You are currently renting out the property for a fixed yearly rental. You use the monthly rental plus personal income to fund the monthly bank repayments.
 
According to Shariah, there is no Zakaat on property purchased without the intention of re-sale. Zakaat is only obligatory on the rental income accrued from the property based on one’s personal financial condition. You state that you purchased the property without the intention of resale initially and later changed your intention. Therefore there is no Zakaat on the property itself. You are only obligated to pay Zakaat on the rental income accrued based on your personal financial situation. You will only pay Zakaat on the cash received from the sale of the property.
 
You state that you took out a loan from an Islamic Bank to fund a portion of the purchase price. We cannot comment on the specifics of the deal unless we are briefed on the terms and condition of the contract. However in principle, deferred liabilities do not prevent the obligation of zakat. If a person is paying off long term debts such as mortgages/loans etc then, the value of the loan will be deducted from ones total wealth and the amount oweable for one year will be calculated as a debt, and only that amount will be considered when applying the rules of zakat. For example, your total liability with the bank for the property is $500 000 and your yearly instalments are $50 000. You will only calculate $50 000 as your liability when calculating your Zakaat.
 
 
And Allah Ta’āla Knows Best
Ismail Desai,
Darul Iftaa
 
Checked and Approved,
Mufti Ebrahim Desai.