The Act 60 Individual Resident Investor Tax Incentive (formerly Act 22) allows you to pay 0% on all capital gains incurred during any period you qualify as 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.
Tax Incentives Don’t Apply to Gains on Securities Prior to Your Move
While the 0% tax rate for capital gains an Act 60 Individual Resident Investor decree holder incurs as a bona fide Puerto Rico resident are lucrative, prospective applicants must bear in mind that they will still owe federal capital gains tax on gains (unrealized or realized) on their securities incurred before their relocation to Puerto Rico.
For any gains on securities incurred after your move to Puerto Rico, the process is simple: Say you buy 100 shares of Microsoft at $500 each for a total investment of $50,000. A year later, you sell the shares for $75,000, representing a profit of $25,000. Under normal circumstances, the $25,000 would be considered a short-term capital gain and taxed accordingly, but as long as you’re a bona fide resident of Puerto Rico, you don’t have to pay any taxes on the $25,000 gain.
The situation is more complicated when it comes to unrealized gains incurred before becoming a bona fide Puerto Rican resident. Say you live in New York and buy 100 shares of Microsoft for a total price of $40,000. You decide to relocate to Puerto Rico to take advantage of the Act 60 Individual Resident Investor tax benefit (as well as the vibrant culture and relatively low cost of living, of course) and by the time you qualify as a bona fide Puerto Rican resident, your shares have incurred $10,000 in unrealized gains. A year later, you sell the shares for $75,000, giving you a total of $35,000 in realized gains, $25,000 of which was earned as a bona fide resident of Puerto Rico. The $25,000 is tax-free, but you owe U.S. federal taxes on the $10,000 earned when you lived in New York.
If you have a lot of securities, it can be tricky to determine which of your gains qualify for the 0% tax rate. That’s why we’ve created a capital gains Excel tracking tool to facilitate the process for our clients. Based on the type of securities you hold and which U.S. capital gains rate you’re obligated to pay on the gains you made before becoming a bona fide Puerto Rico resident, our tool can help you determine how much you owe in U.S. federal taxes—and how much you save under the Act 60 Individual Resident Investor tax incentive.