Puerto Rico’s Act 22 tax incentives, now folded into Act 60 of 2019, let individual investors who move to the island and qualify as bona fide residents pay 0% Puerto Rico tax on interest, dividends, and capital gains that accrue after the move. That headline rate is the entire point of the program, and it is why high-net-worth investors have relocated to San Juan, Dorado, and Rincón since 2012. It is also about to change: Act 38-2026 raises the rate to 4% for anyone who applies after December 31, 2026, so the current version has a hard closing window.
What the Decree Actually Exempts
Once you hold a valid tax decree and qualify as a bona fide resident, three categories of passive income are exempt from Puerto Rico income tax:
- Interest from bank accounts, bonds, and similar instruments earned from Puerto Rico sources after residency begins.
- Dividends from qualifying sources after your move, at a 0% local rate.
- Capital gains on appreciation that occurs after you become a resident, taxed at 0% when you sell.
The exemption is narrow in one important way. Wages, salaries, and active business income earned on the island stay subject to Puerto Rico’s regular income tax, which reaches 33% at the top bracket. The decree is a passive-income instrument, not a general tax shelter.
The federal side is what makes the numbers work. U.S. citizens who qualify as bona fide residents of Puerto Rico for the entire tax year can exclude Puerto Rico-source income from federal gross income under Internal Revenue Code Section 933.1Office of the Law Revision Counsel. 26 U.S. Code 933 – Income From Sources Within Puerto Rico So qualifying passive income is neither taxed by Puerto Rico under the decree nor taxed by the IRS under Section 933. The exclusion does not cover income from services performed as a federal employee.2eCFR. 26 CFR 1.933-1 – Exclusion of Certain Income From Sources Within Puerto Rico
Qualifying as a Bona Fide Resident
Every benefit runs through the IRS’s bona fide residency definition. Federal law sets three tests, and you must satisfy all of them for the full taxable year.3Office of the Law Revision Counsel. 26 USC 937 – Residence and Source Rules Involving Possessions
The Presence Test
The cleanest way to pass is 183 days of physical presence in Puerto Rico during the tax year. The IRS accepts alternatives: 549 days over a rolling three-year period with at least 60 days in each year; no more than 90 days in the mainland U.S. during the year; or no more than $3,000 of earned income from U.S. sources while spending more days in Puerto Rico than in the states.4Internal Revenue Service. Publication 570 (2025), Tax Guide for Individuals With Income From U.S. Territories Flight records, credit card statements, and utility patterns become the evidence during an audit.
The Tax Home Test
Your tax home has to be Puerto Rico. The IRS defines tax home as your regular or principal place of business, employment, or post of duty; if you have no regular place of business, it is wherever you regularly live. An office in Miami or New York that you use regularly will fail this test even if you sleep in Puerto Rico most nights.4Internal Revenue Service. Publication 570 (2025), Tax Guide for Individuals With Income From U.S. Territories
The Closer Connection Test
You cannot have a closer connection to the mainland United States or a foreign country than to Puerto Rico. The IRS weighs where your permanent home is, where your family lives, where your car is registered, where you vote, where you hold a driver’s license, where you bank, and where your social and professional relationships sit.4Internal Revenue Service. Publication 570 (2025), Tax Guide for Individuals With Income From U.S. Territories Most audit disputes happen here. Keeping a fully furnished home in Connecticut while renting a condo in Dorado is exactly the pattern the IRS challenges.
Pre-Move Assets and the Ten-Year Trap
The biggest misconception about Act 22 is that everything you own becomes tax-free the day you land. It does not. Treasury Regulation Section 1.937-2(f) treats assets you owned before establishing residency as “tainted property.” Sell that property within ten years of your move, and the gain is not Puerto Rico-source income.5eCFR. 26 CFR 1.937-2 – Income From Sources Within a Possession Because it is not Puerto Rico-source, Section 933 does not exclude it, and the gain stays on your federal return at regular federal capital gains rates.
There is a split-sourcing election that allocates part of the gain to Puerto Rico based on how long you held the asset as a resident compared to your total holding period. The Puerto Rico portion qualifies for the Section 933 exclusion; the rest remains federally taxable.5eCFR. 26 CFR 1.937-2 – Income From Sources Within a Possession Hold the asset for more than ten years as a resident and the tainted property rule falls away; the full gain can then be Puerto Rico-source.
This applies to stocks, bonds, partnership interests, and digital assets. There is no carve-out for cryptocurrency. Bitcoin you owned before moving is treated the same as a pre-move stock portfolio.
Prior Non-Residency and the Property Purchase
The program is built for new arrivals. Under the current rules for applications filed before January 1, 2027, you cannot have been a resident of Puerto Rico for the previous ten years. Act 38-2026 shortens that lookback to six years for applications filed after December 31, 2026.
Decree holders must also buy residential property in Puerto Rico for use as a primary residence within two years of receiving the decree. Title has to be in the investor’s name, jointly with a spouse, or in a qualifying trust. This deadline was recently tightened from three years to two. For applicants after January 1, 2027, the ownership evidence has to show the title is registered or pending registration in the Puerto Rico Property Registry.
Annual Obligations to Keep the Decree Alive
Two recurring duties catch decree holders who treat Puerto Rico as a tax address rather than a home.
Starting in your second year, you must donate at least $10,000 a year to Puerto Rico nonprofits. Half of that ($5,000) has to go to an organization listed by the Comisión Especial Conjunta de Fondos Legislativos para Impacto Comunitario (CECFL), which maintains a list of approved nonprofits focused on child poverty. The other $5,000 can go to any Puerto Rico nonprofit certified under the local equivalent of a 501(c)(3). You can direct the whole $10,000 to a CECFL-listed charity, since those also qualify as general nonprofits.
You also file an annual report with the Puerto Rico government documenting compliance with residency, property, and donation requirements. The report carries a $5,000 filing fee and goes through the DDEC portal. Missing the report or the donation can trigger revocation, which strips the tax benefits and can expose you to back taxes on income that had been exempt.
How to Apply
Applications go through the DDEC Single Business Portal. You submit a passport, Social Security number, a certified criminal background check from your prior jurisdiction, financial documentation of your income sources, and your professional background. On approval, the Secretary issues a Tax Exemption Decree that functions as a legally binding contract with the government. Current decrees run 15 years, with the option to renegotiate for another 15.
What Changes on January 1, 2027
Act 38-2026, signed into law in 2026, rewrites the economics for anyone who has not yet applied. For decree applications filed after December 31, 2026, the following Puerto Rico rates apply through December 31, 2055:
- Interest and dividends: 4% (up from 0%).
- Post-residency capital gains: 4% (up from 0%).
- Pre-residency capital gains recognized after the ten-year window: 5%.
The non-residency lookback drops from ten years to six, widening the eligible pool. And the whole individual investor program gets a defined runway through 2055, which earlier versions did not have.
If you already hold a decree or your application is pending before the deadline, your existing 0% terms stay intact.
IRS Enforcement and Audit Exposure
The IRS added Puerto Rico Act 22/60 arrangements to its formal compliance campaigns in 2021 and put them on its “Dirty Dozen” tax scam warnings in 2022 and 2023. The agency has identified roughly 100 high-income individuals it believes are claiming benefits without genuinely meeting the residency and source rules, and it expects many of those cases to move toward criminal investigation.
Enforcement reaches the professionals as well. The IRS has said it will investigate accountants, attorneys, and financial advisors who promoted Puerto Rico residency programs, treating them as potential promoters of abusive tax arrangements. If your advisor told you the residency tests were a formality, that advice is a problem for both of you.
The recurring audit issues are the closer connection test and the tainted property rules. Decree holders who keep a primary home stateside, keep their children in mainland schools, or sell pre-move assets without properly reporting the federal side fit the profile. Flight logs, utility bills, voter registration, and local banking activity become the record on which audits turn.
Federal Filings You Still Owe
Moving to Puerto Rico does not end your relationship with the IRS. U.S. citizens still file a federal return, even when most of the income is excluded under Section 933.
If your worldwide gross income exceeds $75,000 in the year you establish bona fide residency, you must file IRS Form 8898 to report the change.6Internal Revenue Service. Instructions for Form 8898 (Rev. October 2024) The same form applies if you later leave and stop being a bona fide resident.7Internal Revenue Service. About Form 8898, Statement for Individuals Who Begin or End Bona Fide Residence in a U.S. Territory Skipping the form is not an immediate penalty, but it tells the IRS you either did not know the rules or chose to ignore them.
You will also file Puerto Rico returns as a resident. Income excluded from the federal return under Section 933 generally appears on the Puerto Rico return, where the decree exempts qualifying passive income. The two systems are designed to work together, and getting sourcing wrong on a single asset sale can create double-taxation problems that take years to unwind.