One of the greatest of many Puerto Rico tax benefits is the Act 60 Investor Resident Individual Tax Incentive (formerly Act 22), which allows you to pay 0% federal or Puerto Rico capital gains tax on all capital gains incurred during the time that you qualify as a bona fide Puerto Rico resident living in Puerto Rico. As you would expect, the key is that the 0% Puerto Rico tax rate for capital gains is only applicable to gains incurred while an individual is a bona fide resident living in Puerto Rico. To enjoy these Puerto Rico tax incentives, you must qualify as a bona fide Puerto Rican resident by passing three tests—the presence test, the tax home test, and the closer connection test—to prove your intention for living in Puerto Rico long term.
You Will Still Owe Federal Capital Gains Tax on Unrealized and Realized Gains on Your Securities Incurred Before Living in 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, Puerto Rico tax law charges 0% tax on that $25,000 gain.
However, let’s say that, before relocating for Puerto Rico tax benefits, you were living in New York and bought shares of Microsoft for a total cost of $40,000. Later, you are living in 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, and savoring Puerto Rico capital gains tax exemptions, 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 both Puerto Rico capital gains and Puerto Rico income tax laws state that 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, both before and after eligibility for the Puerto Rico tax rate, 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 with the tax incentives Puerto Rico has to offer under the Act 60 Investor Resident Individual Tax Incentive.
Disclaimer: Neither PRelocate, LLC, nor any of its affiliates (together “PRelocate”) are law firms, and this is not legal advice. You should use common sense and rely on your own legal counsel for a formal legal opinion on Puerto Rico’s tax incentives, maintaining bona fide residence in Puerto Rico, and any other issues related to taxes or residency in Puerto Rico. PRelocate does not assume any responsibility for the contents of, or the consequences of using, any version of any real estate or other document templates or any spreadsheets found on our website (together, the “Materials”). Before using any Materials, you should consult with legal counsel licensed to practice in the relevant jurisdiction.