Answer
Wa `alaykum as-Salamu wa Rahmatullahi wa Barakatuh.
In the Name of Allah, Most Gracious, Most Merciful.
All praise and thanks are due to Allah, and peace and blessings be upon His Messenger.
In this fatwa:
Some scholars view that rental properties are not subject to Zakah. Some other scholars say that they are subject to Zakah.
In his response to your question, Prof. Dr. Monzer Kahf, Professor of Islamic Finance and Economics at Qatar Faculty of Islamic Studies, states:
First of all, it is all right to be confused about all this for this matter itself has not yet been settled between Muslim scholars and there is no specific text on this issue. It is a matter of ijtihad (scholarly reasoning). The existing arguments are as follows:
1- Traditional jurists: They say that this is not something that you want to sell, nor is it any other thing that we have a text about concerning its Zakatability. It is also not something that we can derive a ruling for by analogy or Qiyas.
Therefore, it is not subject to Zakah. They also add the fact that buildings for renting existed in the past, though on a small scale, and the jurists, at the glorious time of the flowering of knowledge and ijtihad, did not consider them subject to Zakah. Hence, this opinion states that rental property is not Zakatable.
2- Several other scholars look at rental property as wealth that is invested, which, in turn, makes a difference between the rich and the poor. The general principle that came in the verse of Surat At-Tawbah is that Zakah is on ‘Amwal‘ (money) and a rental property comes under this kind of wealth. Also there is an authentic hadith that says that Zakah is a duty upon the rich, and the owner of rental property is rich. Therefore, it must be subject to Zakah.
Scholars hold that Zakah is calculated from either the net rent (after payment of insurance, taxes, maintenance and other related expenses) at a rate of 10%, similar to agricultural products that are watered by rain, or on the gross rent (before deductions) at the rate of 5%. This is based on an analogy made with agricultural land where its produce has Zakah.
Other people, including myself, argue 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.
Therefore, 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%.
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 your feel in your heart and God-consciousness and piety.
Allah Almighty knows best.