The Act 60 Investor Resident Individual Tax Incentive (formerly Act 22) allows you to pay 0% tax on all capital gains incurred during the time that you qualify as a bona fide resident of Puerto Rico. As you would expect, the key is that the 0% capital gains tax rate is only applicable to gains incurred while an individual is a bona fide resident of Puerto Rico. To qualify as a bona fide Puerto Rican resident, you must pass three tests—the presence test, the tax home test, and the closer connection test—to prove your intention to live in Puerto Rico long term.
You Will Still Owe Federal Capital Gains Tax on Unrealized and Realized Gains on Your Securities Incurred Before Your Relocation to Puerto Rico
For example, you move to Puerto Rico and then buy 100 shares of Microsoft at $500 each for a total investment of $50,000. Then a year later you sell those same 100 shares for $75,000 earning a profit of $25,000. This profit would normally be treated as a short-term capital gain, but since the entire gain occurred and was realized during the period you qualified as a bona fide resident of Puerto Rico, there is 0% tax on that $25,000 gain.
However, let’s say that you were living in New York and bought shares of Microsoft for a total cost of $40,000. Later you decide to relocate to Puerto Rico to take advantage of the Act 60 Investor Resident Individual Tax Incentive and enjoy a lower cost of living and the Caribbean lifestyle. By the time you qualified as a bona fide Puerto Rican Resident those shares had increased in value to $50,000, incurring $10,000 in unrealized gains. A year later you sell your 100 shares of Microsoft for $75,000 giving you a total of $35,000 in realized gains. You will owe U.S. federal taxes on the $10,000 gain that occurred when you were still living in New York, but the $25,000 gain which occurred while you were a bona fide resident of Puerto Rico is tax free.
To help our clients who own securities determine their capital gains taxes, we have created a capital gains Excel tracking tool. Based on the type of securities and what U.S. capital gains rate you would be subject to on gains that occurred before becoming a bona fide resident of Puerto Rico, our tool can help you figure out how much you will owe in U.S. federal taxes and better yet, how much you will save under the Act 60 Investor Resident Individual Tax Incentive.