Question 354) - Can the Funeral prayer be held in a Masjid built for five time's Salah?

A: It is Makruh. The Nabi (S.A.W.) would pray it outside of the Masjid where the deceased would be placed.*

*Al-Bukhari narrates from Abu Huiayrah RADI. that Rasulullaah (S.A.W.) announced the death of the Negus on the day that he died. He went with the Muslims to the Musalla, formed them into rows and recited four Takbir upon him.
'Abdullaah bin 'umar RADI. narrates that the Jews brought to Rasulullaah (S.A.W.) a man and woman from them who had committed Zina. He ordered their execution. They were stoned near the place Funeral Prayers were held at the Masjid. The first Hadith clarifies that he went out to the Musalla to pray, even though the corpse was not present. The second Hadith states that Funerals were at the Masjid.
Muhammed bin 'Abdillah bin Jahsh RAH. narrates, "We were sitting in the courtyard of the Masjid where Funerals were held. Rasulullaah (S.A.W.) was sitting amongst us ..." This Hadith of Ahmad clarifies that the place of Funerals was in the courtyard of the Masjid.
Ibnul Humam states in Fathul Qadir, "And then there is the narration in Muslim that when Sa'd bin Abi Waqqas RADI. died, 'Aishah radiyAllaahu 'anha said, 'Bring him into the Masjid so that I may pray upon him. 'They refused her and she said, 'By Allaah, the Nabi (S.A.W.) prayed over the two sons of Bayda in the Masjid - Sahl and his brother.
We say that narrating an incident does not mean that that was the general situation. That may have been due to a necessity that Rasulullaah (S.A.W.) was in I'tikaf. Even if we accept the lack of the emergency, the refusal of the Sahabah and the Tabi'un is proof that he avoided that thereafter."

~ al-Quduri ~