People moving to Puerto Rico for tax benefits are usually chasing one thing: Act 60, the territory’s incentive code, which can drop qualifying investment income to 0% and export service profits to 4%. No U.S. state offers that combination. But the headline rates come with real conditions. Federal tax doesn’t vanish, gains that built up before your move stay taxable at the federal level, and the IRS has been actively pursuing people who claim Puerto Rico residency without truly living there.
What Act 60 Actually Gives You
Act 60, formally the Puerto Rico Incentives Code, consolidated several older tax laws. Two decrees drive most relocations from the mainland.
The Individual Resident Investor decree is the one most individuals come for. It fully exempts dividends, interest, and capital gains that accrue after you become a bona fide resident of the territory from Puerto Rico income tax. Because Puerto Rico-source income is also excluded from federal gross income under Section 933 of the Internal Revenue Code, qualifying investment income can end up taxed at 0% on both sides.1Office of the Law Revision Counsel. 26 U.S. Code 933 – Income From Sources Within Puerto Rico
The Export Services decree sets a flat 4% corporate income tax rate on income from services provided to clients outside Puerto Rico. A business applies through the Department of Economic Development and Commerce. Decrees generally last 15 years and require an annual compliance report.
The decrees are not free. The Individual Resident Investor application fee is approximately $5,005, with a separate one-time acceptance fee. Once granted, every Individual Resident Investor must make a $10,000 annual charitable donation to Puerto Rico nonprofits, split in a specific way: at least $5,000 goes to organizations on a list published by the Special Joint Committee on Legislative Funds for Community Impact, which focuses on reducing child poverty, and the remaining $5,000 goes to another qualifying nonprofit certified under Puerto Rico’s internal revenue code.2Biblioteca Virtual de OGP. Puerto Rico Incentives Code – Act 60-2019 You cannot send both halves to the same charity or the same category. An annual compliance filing and fee are also required. Fall behind on any of this and your decree can be revoked, with standard tax rates applied retroactively.
One point that trips up newcomers: without a decree, moving to Puerto Rico swaps your state income tax for Puerto Rico income tax, not for zero. Residents without Act 60 pay progressive Puerto Rico rates that can reach the low-to-mid 30s on territorial-source income.
Federal Tax Doesn’t Disappear
Section 933 lets a bona fide Puerto Rico resident exclude Puerto Rico-source income from federal gross income.1Office of the Law Revision Counsel. 26 U.S. Code 933 – Income From Sources Within Puerto Rico That is the mechanism everything else runs on, and it has clear limits. Puerto Rico-source income is excluded. Everything else is not.
If you earn rental income from a property on the mainland, receive a pension from a former stateside employer, or do freelance work for U.S.-based clients in a way that doesn’t qualify under your Act 60 decree, that income stays subject to federal income tax.3Internal Revenue Service. Topic No. 901, Is a Person With Income From Sources Within Puerto Rico Required to File a U.S. Federal Income Tax Return Compensation earned as a federal employee is always taxable at the federal level, even if you perform the work entirely in Puerto Rico.1Office of the Law Revision Counsel. 26 U.S. Code 933 – Income From Sources Within Puerto Rico
Social Security and Medicare taxes also carry over: 6.2% for Social Security and 1.45% for Medicare on the employee side, with matching employer contributions, same as on the mainland.4Internal Revenue Service. Topic No. 903, U.S. Employment Tax in Puerto Rico Puerto Rico residents who pay in collect Social Security like anyone else.
The Capital Gains Lookback Rule
This is where most of the planning complexity sits, and where a lot of would-be movers overestimate the benefit. Gains that accrue after you become a bona fide resident can qualify for the 0% Act 60 rate. Gains that built up before you moved cannot.
Federal law applies a 10-year lookback. If you were a U.S. citizen or resident (other than a Puerto Rico bona fide resident) during any of the 10 years before selling an asset, and you held that asset before moving, the gain tied to your pre-move holding period is treated as U.S.-source income. It stays subject to federal capital gains tax.5IRS.gov. Puerto Rico Source Rules – Ten-Year Lookback Rule
You do have an election for marketable securities. You can split the gain based on fair market value on the first day of your Puerto Rico holding period. The portion that accrued after you became a bona fide resident is treated as Puerto Rico-source and may qualify for the Act 60 exemption. The portion that accrued before stays U.S.-source and federally taxed. Don’t make the election and the IRS treats the entire gain as U.S.-source.5IRS.gov. Puerto Rico Source Rules – Ten-Year Lookback Rule
On the Puerto Rico side, if you hold an asset for more than 10 years after becoming a bona fide resident and sell before January 1, 2036, the pre-move appreciation may qualify for a reduced 5% Puerto Rico tax rate. That doesn’t erase federal tax on the pre-move gain, but it lowers the territorial piece.
The practical read: the biggest advantages go to people who buy new investments after establishing residency. Showing up with a heavily appreciated portfolio and expecting to sell it tax-free is the single most common misreading of Act 60.
Proving You Really Live There
The decree is only half of it. The IRS also has to accept that you are a genuine bona fide resident. Three tests, all three required, outlined in Publication 570:6Internal Revenue Service. Publication 570 – Tax Guide for Individuals With Income From U.S. Territories
- Presence test: at least 183 days of physical presence in Puerto Rico during the tax year.
- Tax home test: your main place of business or employment must be in Puerto Rico, not on the mainland.
- Closer connection test: your personal and economic ties to Puerto Rico must be stronger than your ties to any other location. The IRS looks at where your immediate family lives, where you keep your belongings, where you vote, where your bank accounts are, and where you hold a driver’s license.
Buying a condo in San Juan and visiting is not enough. The IRS has intensified enforcement on Puerto Rico residency claims in recent years, with investigations and criminal prosecutions targeting taxpayers who claimed Act 60 benefits while actually living on the mainland. If the IRS rejects your residency claim, it can impose full federal tax liability on the income you excluded, plus penalties and interest.
Paperwork matters, too. If your worldwide gross income exceeds $75,000 in the year you establish or end bona fide residency, you must file Form 8898 to notify the IRS of the change.7Internal Revenue Service. Instructions for Form 8898 That threshold is calculated individually, even for married couples, and includes all income before deductions.
Estate Tax: A Boundary Worth Knowing
Federal estate tax treatment depends on how you got your U.S. citizenship. Under 26 U.S.C. ยง 2209, a person who was born in Puerto Rico and obtained citizenship solely through birth or residence in the territory is treated as a “nonresident not a citizen” for estate tax purposes, which means only U.S.-situs assets are reached.8Office of the Law Revision Counsel. 26 USC 2209 – Certain Residents of Possessions Considered Nonresidents Not Citizens of the United States
If you were born on the mainland and later moved to Puerto Rico, Section 2209 does not apply. Your estate stays subject to the full federal estate tax on worldwide assets, the same as any other U.S. citizen. For high-net-worth families, assuming otherwise is an expensive mistake.
What the Tax Savings Actually Cost You
The money saved on income tax does not translate directly to money kept. Several line items on the island run higher than most mainland movers expect.
Electricity. The island relies heavily on imported fuel for power generation, and residential rates routinely run double what mainland households pay. Monthly electric bills of $300 to $500 are common even for modest homes running air conditioning, which is a year-round necessity.
Groceries and imported goods. Prices are inflated by federal cabotage requirements under the Merchant Marine Act of 1920, commonly called the Jones Act, which requires goods shipped between U.S. ports to travel on American-flagged, American-built, American-crewed vessels. Shipping a standard 20-foot container from the mainland to Puerto Rico has historically cost roughly twice as much as shipping the same container to the nearby Dominican Republic. That premium shows up at the register.
Sales tax. The territory’s IVU applies to most retail purchases at a combined 11.5%, split between a 10.5% territorial portion and a 1.0% municipal portion. Designated professional and business-to-business services are taxed at 4%.
Vehicle excise. Puerto Rico imposes an excise tax on vehicles brought from the mainland. Rates depend on type and can reach 17% to 20% of the taxable price for commercial vehicles.9Justia. Laws of Puerto Rico Title Thirteen 31628 – Excise Tax Rates Buying locally after you arrive is sometimes cheaper than shipping a car over.
Health insurance. Puerto Rico does not participate in the ACA health insurance marketplace available on the mainland.10Medicaid.gov. Puerto Rico State Overview The territory runs its Medicaid program through managed care plans for those who qualify. Private insurance is available through local carriers like Triple-S Salud, but the market is smaller and options are fewer than most mainland residents are used to. If you’ve been shopping on Healthcare.gov, plan ahead.
Homeowner insurance. Hurricane and earthquake deductibles tend to be high. Concrete homes in coastal areas might carry annual hazard premiums of $1,000 to $2,500 on a $250,000 property, with wooden structures costing significantly more.
On the other side of the ledger, property taxes are genuinely low. The municipal collection center, CRIM, assesses property at values often well below market, and owner-occupied homes get an exemption on the first $15,000 of assessed value. Effective rates for residential property tend to sit below half a percent. For someone leaving a high-property-tax state, that is a real and recurring saving.
Act 60 can deliver what it advertises. It rewards people who move all the way, who structure their investments to grow after the move rather than before it, and who treat the residency tests as the real work. For anyone looking for a part-time arrangement or a quick exit from capital gains on an existing portfolio, the arithmetic is less generous than the pitch.