Paying Zakat on a Rental Property and How to Determine if a Financial Product is Shariah Compliant

Answered by Shaykh Taha Abdul-Basser
Question: As-Salamu`alaykum wa rahmatullah wa barakatuh,
All praise and thanks due to Allah subhanu wa ta’ala and peace and blessings be upon His final prophet Muhammad sallallahu alaihai wassalam.
I bought a condo (apartment) as an investment to rent it out. Its total price was about 225,000 and I took 100,000 from from an Islamic financing company, but then I have learned that the company is not shariah compliant.  I have 2 questions.
What should I do now that I know my means of financing was  not halal? How should I pay zakat on that? Should I pay zakat on approximately 125,000, the amount I paid from my account? Currently I am paying zakat on the rent I am receiving after excluding all the expenses.
jazakAllah for your help.

Answer:

بسم الله الرحمن الرحيم
الحمد لله رب العالمبن والصلاة والسلام على سيدنا محمد وعلى اله وصحبه اجمعين

1. If, in order to acquire real estate, you took out financing from company X that purported to offer shari`ah-compliant financing, but subsequently became convinced (via shari`ah-acceptable means [see below]) that the financing arrangement into which you entered was mislabeled and that it was not in fact halal, then you should act according to the reality of the transaction at the heart of the financing arrangement in question.
1.1 In this case, because of the reality of the transaction in question you should do the following
1) know that the property that you purchased with the financing is in fact yours, i.e. treat the purchase as valid and
2) continue to make payments that are due according to the original contract(s). Note that this is specific to this case and due to the nature of the flawed transaction into which you apparently entered.

2. There is no zakat due on the funds (125,000) that you used to purchase the condo, unless a) the funds had otherwise become zakatable (e.g. because they had been in your position for more than an Islamic [lunar] year) and b) you had not paid zakat on them).
2.1 Zakat is not due on the condo itself since real estate is not zakatable unless it was acquired with the intention of sale.
2.2. Zakat is due on the rent (cash) that of you receive from renting this property, if it fulfills the conditions of zakatable items, i.e. it exceeds the exemption limit (nisab) and has been in your possession for more than a Islamic (lunar) year.

How Does One Know Whether a Claim of Permissibility is Trustworthy and Reliable?

This question underscores the importance of being an educated consumer of purported shari`ah-compliant financial services and products. A consumer should only consume services and products (such as home financing) from service providers whose process and shari`ah compliance comply with the adopted positions of the ummah’s leading fuqaha’-specialists in this domain.
These authoritative positions are adopted in the AAOIFI (Accounting and Auditing Organization of Islamic Financial Institutions) Shari`ah Standards, a set of documents that captures the authoritative positions on financial matters. Importantly, the AAOIFI Governance and Shari`a Standards require that there be a shari`a board composed of a minimum of three members and that at least two of them be fuqaha’ known among their peers for their application of fiqh to the domain of finance. Muslim consumer should avoid doing business with groups that do not comply with these standards. Examples of non-compliance are
1) not having a shari`ah board at all;
2) not having a shari`ah board consisting of at least three (3) people;
3) not having a shari`ah board of which at least two who are fuqaha’ known for their expertise in the application of fiqh to the area of finance (as opposed to being prayer leader, preachers, Qur’an reciter, `ulama who are specialists in other areas of the Shari`a);
4) failing to make available to consumers (preferably via the web) a certificate of compliance; have one but that issued a cert but the cert is it reviewed

Resolving Conflicting Views

There are multiple opinions among our fuqaha’ on the permissibility of financial products, services, models, etc. This is to be expected. However, once a certificate of compliance (fatwa) has been issued by an qualified Shari`ah board, then unless the certification was a clear error as pointed out by other fuqaha’ (not merely a differing position), a non-expert Muslim may act according to it and it is inconsistent with the principles of ifta’ that other non-experts condemn the former for doing so or decry the product as impermissible.

References:

al-Khatib al-Shirbini/al-Nawawi, Mughni l-Muhtaj `ala l-Minhaj.
al-Ramli/al-Nawawi. Nihayat al-Muhtaj.
al-Buhuti/al-Hijjawi, al-Rawd al-Murbi ` al-Zad.
al-Mardawi, al-Insaf, n.d, n.p.
AAOIFI Shari`ah Standards