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The Act 22 Puerto Rico Tax Incentive: Unveiling the Ultimate Investment Opportunity

The enactment of Act 22, now part of Act 60-2019, marks a pivotal development in Puerto Rico's economic landscape, offering substantial tax incentives to eligible investors. This legislation, originally established to stimulate economic growth and attract high-net-worth individuals to the island, provides a framework for significant tax reductions on investment income. Its significance for investors lies in its potential to significantly mitigate tax liabilities on capital gains, dividends, and interest income, thereby presenting an unparalleled investment opportunity within the jurisdiction of the United States.

This article will serve as an overview of this legislation's strategic benefits and underlying intent, positioning Puerto Rico as a unique and attractive destination for investment endeavors.

Key Takeaways

  • Act 22 offers significant tax exemptions on passive income and capital gains for investors who establish bona fide residency in Puerto Rico, aiming to stimulate economic growth.
  • The legislation encourages both short-term and long-term investments in Puerto Rico by providing complete exemptions on long-term capital gains and preferential rates for short-term gains.
  • Eligibility for Act 22's benefits requires investors to meet specific criteria, including property ownership and physical presence in Puerto Rico for at least 183 days per year.
  • Investing in Puerto Rico's luxury real estate (as illustrated in a hypothetical calculation) under Act 22 can yield significant tax savings on capital gains and rental income.

What is the Puerto Rico Tax Act 22?

Act 22, officially known as the Act to Promote the Relocation of Investors to Puerto Rico was instituted in 2012 with a clear mandate to rejuvenate the island's economy by drawing investors through compelling tax incentives. By significantly reducing the tax burden on potential investors, the government aimed to catalyze an influx of capital into the local economy, spurring growth and creating job opportunities.

The Tax Advantages under Act 22

The enactment of Act 22, subsequently integrated into Act 60-2019, furnishes investors with an array of tax advantages designed to foster a conducive investment climate within Puerto Rico. These incentives, pivotal to the Act's objective of stimulating economic growth, offer profound tax relief across various income domains, thereby positioning Puerto Rico as an attractive destination for investors seeking to optimize their tax liabilities. Below is a detailed examination of the specific tax exemptions provided under Act 22:

Income Tax Benefits for Residents

One of the cornerstone benefits of Act 22 is the provision of significant income tax advantages for individuals who establish residency in Puerto Rico. Qualifying bona fide residents are exempt from local Puerto Rico income taxes on passive income generated from investments.

  • Significant Tax Advantages for New Residents: Act 22 offers substantial income tax advantages to individuals who decide to reside in Puerto Rico. This is a strategic move aimed at attracting investors by reducing their tax burdens.
  • Exemption from Local Income Taxes on Passive Income: One of the most compelling aspects of Act 22 is its exemption from local income taxes on passive income. Qualifying residents can earn passive income from their investments without incurring local income taxes on these earnings.
  • Broad Spectrum of Income Types Covered: The exemption covers a wide range of passive income types, notably including interest earned from investments, dividends received from corporations, and certain distributions.

Capital Gains Tax Benefits Including on Real Estate Transactions

Act 22 offers compelling tax benefits related to capital gains, aiming to attract investment in financial markets and real estate. For new residents of Puerto Rico, the Act provides a complete exemption on taxes for long-term capital gains accrued after relocating to the island.

Below is a breakdown of the advantages:

  • Complete Exemption on Long-term Capital Gains: Investors who relocate to Puerto Rico and become new residents enjoy a total exemption from local taxes on long-term capital gains. This exemption applies to gains accrued after the investor relocates to Puerto Rico, encouraging the holding of investments for longer periods to benefit from this tax advantage.
  • Attractive for Real Estate Investments: The exemption on capital gains extends to the sale of real estate in Puerto Rico. This provision makes Puerto Rico a beautiful location for real estate investors, as profits derived from the appreciation of real estate value over time will not be subject to local capital gains tax.
  • Preferential Tax Rates for Short-term Capital Gains: While long-term capital gains benefit from a complete exemption, short-term capital gains—those realized within a year of the investment—are taxed at preferential rates. This tiered approach incentivizes both short-term and long-term investment strategies, allowing investors to plan their investments with a clear understanding of their tax implications.

Interest and Dividend Income Tax Advantages

The Act extends its tax advantages to include tax exemptions for interest and dividend income new residents receive from investments. This provision is particularly advantageous for investors with substantial portfolios, as it allows for investment income growth free from local taxation.

  • Extension of Tax Advantages: The Act broadens its scope of tax advantages to include tax exemptions for interest and dividend income. This extension is significant as it covers two major types of investment income, offering a comprehensive benefit to investors.
  • Beneficial for Investors with Substantial Portfolios: Investors with substantial portfolios benefit considerably from this provision. The exemption allows the income from these portfolios to grow without deducting local taxes, which can substantially increase the overall return on investments over time.
  • Facilitates Growth of Investment Income: By exempting interest and dividend income from local taxation, the Act facilitates investment income growth. This tax advantage allows investors to reinvest their earnings, compounding their investment growth and enhancing the potential for wealth accumulation.
  • Incentivizes Relocation to Puerto Rico: This tax advantage serves as an incentive for investors considering relocation. The prospect of tax-exempt interest and dividend income can be a decisive factor for investors in choosing Puerto Rico as their place of residency, thereby contributing to the local economy.

Eligibility Criteria for Investors to Qualify

To avail of the benefits outlined under Act 22, investors must meet specific eligibility criteria central to establishing bona fide residency in Puerto Rico. Investors must relocate to Puerto Rico and demonstrate bona fide residency. Here is a summarized presentation of the requirements to gain bona fide residency in Puerto Rico, or you may check our detailed discussion regarding this topic entitled "How to be a Permanent Resident in Puerto Rico":

Category

Actions

Considerations

Documentation Needed

Property Ownership

Purchase or lease property in Puerto Rico.

Choose a location that suits your lifestyle and budget.

Property deed or lease agreement.

Family Relocation

Move your family to Puerto Rico, if applicable.

Consider the needs of family members, including education and healthcare.

Proof of family members' residency (e.g., school enrollment for children).

Financial Integration

Transfer financial accounts to Puerto Rican institutions.

Evaluate local financial services and choose suitable institutions.

Account statements from Puerto Rican institutions.

Physical Presence

Reside in Puerto Rico for at least 183 days per year.

Keep detailed travel records to prove physical presence.

Travel records, utility bills in Puerto Rico.

Legal Compliance

Apply for and obtain a tax exemption decree.

Ensure compliance with all legal requirements for residency and tax benefits.

Application for tax exemption decree, supporting legal documents.

Commitment

Maintain residency for the stipulated period as per Act 22.

Plan for long-term residency considering personal and financial implications.

Ongoing documentation of residency status (e.g., annual tax filings in Puerto Rico).



Let’s Take a Sample Calculation

Let’s take this property from the Christie’s International Real Estate Puerto Rico’s Featured properties. 

Image Source: christiesrealestatepr.com

1104 PICCIONI STREET Unit: 2

The property is a 3-bedroom, 2.5-bathroom apartment located at 1104 Piccioni Street Unit 2, San Juan, PR 00907, with a sales price of $695,000. It features marble flooring, high ceilings, natural light, a gourmet kitchen with state-of-the-art appliances, and each bedroom has A/C split units. The building is equipped with a full generator and water cistern for emergencies. The property's Airbnb-friendly policy makes it an attractive investment opportunity​​.

To calculate hypothetical savings under Act 22, let's assume the property appreciates in value and generates rental income, both of which could benefit from Act 22's tax advantages. We'll need to consider the initial investment, estimated appreciation, rental income, and compare tax liabilities with and without Act 22 benefits. Let's proceed with these calculations.

Aspect

Calculation

Future Value of Property

After 5 years, assuming an annual appreciation rate of 4%, the property's value would increase to approximately $845,574, up from the purchase price of $695,000.

Capital Gains

The capital gains on the property, therefore, would be about $150,574.

Capital Gains Tax Savings

With Act 22's exemption from local taxes on long-term capital gains, the savings on capital gains tax would be approximately $22,586 (assuming a 15% tax rate applicable without Act 22 benefits).

Total Rental Income Over 5 Years

Assuming an annual rental income of $50,000, the total rental income over the holding period would be $250,000.

Rental Income Tax Savings

With Act 22's exemption from local income taxes on passive income, the tax savings on rental income would be about $75,000 (assuming a 30% tax rate applicable without Act 22 benefits).

Total Tax Savings Under Act 22

Combining the savings on both capital gains tax and rental income tax, the total tax savings under Act 22 would be approximately $97,586.

 

These figures illustrate the significant financial benefits and tax savings that can be achieved by leveraging the Act 22 incentives for investing in Puerto Rico's real estate. ​

Conclusion

Act 22, transforming into Act 60-2019, establishes Puerto Rico as a premier destination for investors by offering unprecedented tax incentives, making it an attractive proposition for those looking to optimize their investment returns within the United States jurisdiction. For us at Christie's International Real Estate Puerto Rico, these incentives represent a golden opportunity for our clients considering buying, selling, or renting their properties on the island. With a deep understanding of the local market and the intricacies of Act 22, we are perfectly positioned to guide our clients through the process of making the most of these exceptional benefits.

Contact Christie's International Real Estate Puerto Rico today to discover how you can benefit from Act 22 and make your investment dreams a reality.

FAQs

Who passed Act 22 in Puerto Rico?

Act 22, officially known as the Act to Promote the Relocation of Investors to Puerto Rico, was enacted by the Puerto Rican government in 2012 during the administration of Governor Luis Fortuño. The legislative body of Puerto Rico, consisting of the House of Representatives and the Senate, passed the Act as part of an economic strategy to attract investors and high-net-worth individuals by offering them significant tax incentives.

In 2019, Act 22 transformed and was integrated into Act 60-2019, also known as the Puerto Rico Incentives Code. This integration aimed to consolidate and simplify the island's tax incentive programs into a more cohesive and efficient framework while maintaining the advantageous tax benefits introduced by Act 22.

How has the Puerto Rican government addressed the controversy surrounding Act 22?

In response to the controversy and criticism surrounding Act 22, the Puerto Rican government has taken steps to ensure that the benefits of the Act also support the local economy and contribute to public welfare.

  • Beneficiaries of the Act are required to make annual charitable contributions to local nonprofits, ensuring the local community benefits from the wealth generated.
  • The government has intensified scrutiny and compliance checks, including stricter residency and physical presence requirements enforcement, to prevent abuse of the Puerto Rico tax incentives.

These measures reflect the government's attempt to balance attracting investment and wealthy individuals with the need to ensure that the economic benefits are more widely distributed among Puerto Rican residents, contributing to the island's overall development and addressing some of the ethical and economic concerns raised by critics of Act 22.

 

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