Dr. Monzer Kahf, a Scholar in Islamic Economics and a Financial Expert, responds to this issue as thus:

“I do not recommend tampering with Zakah (pay it to them, then they give it back to me!) as Zakah is a sacred pillar of our religion and must always remain in its purity and sanctity.

Zakah can be paid in kind, not necessarily in cash. Therefore, you may use your Zakah money to build the house provided that you are going to give it, all or the part finance by Zakah to the family of your sister. You must transfer ownership formally. The transfer of ownership to your sister’s family represent your payment of the Zakah. Besides, if the cost of building the house is more than the amount of Zakah that is due on you this year, you can either transfer a part of the property to the poor family, the equivalent to the amount of Zakah, or transfer the whole property and consider the remaining as advance payment of Zakah for future years, then next year you calculate your due Zakah and deduct it from the advanced amount and continue doing so until you amortize the advanced payment in full. Of course you always have the alternative to consider any extra amount as Sadaqah in addition to your Zakah payment.”