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The Act 60 New Tax Incentives Code for Puerto Rico Real Estate

Act 60 represents a significant consolidation of Acts 20 and 22 into a unified legislative framework, enacted on July 1, 2019, to position Puerto Rico as a premier destination for investors and entrepreneurs. Merging the benefits previously available under the two acts aims to stimulate economic growth and make the island more appealing to U.S. citizens through attractive and compelling tax incentives. This legislation marks a pivotal milestone in the strategic efforts of the Puerto Rican government to boost its economic competitiveness and attract investment by offering lucrative tax benefits.

Key Takeaways

  • Act 60 offers extensive tax incentives to stimulate investment and economic growth in Puerto Rico enhancing its appeal as a premier investment destination.
  • To qualify for Act 60's benefits, individuals must become bona fide residents of Puerto Rico, demonstrating commitment through presence and investment in the local economy.
  • Investing in luxury real estate under Act 60 provides lifestyle benefits and significant tax advantages including income tax exemptions and reduced property taxes.
  • Potential investors should consult with tax advisors specialized in Act 60 to fully understand and maximize the financial implications and benefits of investing in Puerto Rico.

Purpose of The Puerto Rico Tax Incentive Act 60

Economic Competitiveness

The core objective of Act 60 is to enhance Puerto Rico's appeal as an investment destination. By providing a simplified and transparent process for obtaining tax incentives, the Act aims to foster trust and streamline the application process for potential investors.

Attraction of Investment

Through specific chapters like Chapter 2 for Resident Individual Investors and Chapter 3 for Export Services, Act 60 targets the attraction of both individual investors and service-oriented businesses. These provisions shield new residents from most federal income taxes, provided they live in Puerto Rico for at least half the year.

Tax Incentives

Key tax benefits under Act 60 include minimal or no taxes on interest, dividends, and certain capital gains for residents. Property taxes are also notably lower than in the mainland U.S., making real estate investment appealing.

The Act 60 Tax Planning Importance

Act 60 introduces a strategic tax planning opportunity that allows U.S. taxpayers to reduce their tax liabilities legally significantly. By becoming residents of Puerto Rico and complying with specific requirements of Act 60, individuals and businesses can minimize or potentially eliminate U.S. federal income tax liabilities on employment, investment, and corporate income. This is achievable through the Act's provisions, which offer a distinct tax treatment for income sourced in Puerto Rico, thus encouraging investment and residency in the territory.

Key Incentives of Act 60

Act 60 offers compelling tax incentives designed to attract investors and promote economic growth in Puerto Rico:

  • Exemption from Income Taxes on Interest and Dividends: Resident individual investors can benefit from a complete tax exemption on income derived from interest and dividends until January 1, 2036. This incentive aims to make Puerto Rico an attractive location for personal and corporate investment, ensuring qualified residents can enjoy significant savings on their investment income.
  • Special Tax Rate on Net Long-Term Capital Gains: A noteworthy feature of Act 60 is imposing a special tax rate of only 5% on net long-term capital gains. This rate applies to the appreciation of assets recognized ten years after the investor becomes a resident of Puerto Rico, provided the gains are recognized before January 1, 2036. This incentive encourages long-term investment and financial planning within Puerto Rico, offering substantial tax savings for eligible residents.

How to Qualify for these Tax Incentives?

Becoming a Bona Fide Resident

To access the tax incentives offered by Act 60, individuals must first establish themselves as Bona Fide Residents of Puerto Rico. This designation is crucial for eligibility and entails the following criteria:

  • Presence Test: The foundational requirement for achieving Bona Fide Resident status under Act 60 involves physically being present in Puerto Rico for a minimum of 183 days during the tax year. This presence test ensures that the individual's tax residency is unequivocally tied to Puerto Rico for most of the year, signifying a genuine relocation and commitment to the territory.
  • Tax Home and Closer Connection: Individuals must only maintain a tax home in Puerto Rico if they meet the presence test. This means that their primary place of business or employment, or if they have neither their primary residence, must be in Puerto Rico. Furthermore, they cannot have a closer connection to any other country or the U.S. This closer connection is determined by where the person has more significant ties, including family, personal belongings, social, cultural, or religious participation.

Specific Investment Requirements

To qualify for the tax incentives offered under Puerto Rico's Act 60, individuals must comply with specific investment requirements after becoming residents. These requirements are designed to ensure that the benefits of Act 60 contribute directly to the economic development of Puerto Rico and involve tangible commitments from investors. The key investment requirements include:

  • Mandatory Purchase of Residential Property: Within the first two years of residency in Puerto Rico, individuals must purchase residential property. This mandate underscores the commitment to the territory, ensuring investors contribute to the local real estate market and establish a physical presence supporting their status as bona fide residents.
  • Charitable Contributions: Individuals are expected to contribute to the Puerto Rican economy through charitable contributions. The amount required for these contributions has been increased to $10,000, reflecting an emphasis on the social responsibility of investors to give back to the community. This requirement helps foster a reciprocal relationship between the investors and the local economy, aiming to have a broader impact beyond the fiscal benefits the investors enjoy.

These investment requirements are part of a broader strategy under Act 60 to attract investments that benefit the investors through significant tax incentives and support Puerto Rico's economic and social development.

Benefits of Investing in Luxury Real Estate under Act 60

Investing in luxury real estate in Puerto Rico under Act 60 is not only a lifestyle choice but also a strategic financial decision that offers a myriad of benefits:

Solidification of Commitment to Puerto Rico

Purchasing luxury real estate in Puerto Rico solidifies an investor's commitment to the territory as their primary residence. This commitment is crucial in qualifying for the substantial tax incentives provided under Act 60, which are designed to promote economic growth and attract affluent individuals and investors to the island.

Contribution to Economic Growth

By investing in high-end real estate, investors contribute to the local economy in several ways. First, purchasing property directly injects capital into the real estate market. Second, it often leads to further investment and spending within the local economy, including construction, renovation, and various service industries. This economic activity supports local businesses, creates jobs, and contributes to the region's overall development.

Qualification for Tax Benefits

Act 60 provides a specific tax exemption decree for resident individual investors, including exemptions from Puerto Rico income taxes on interest and dividends and special tax rates on net long-term capital gains. By establishing residency and investing in luxury real estate, investors can access these incentives, significantly reducing their tax liability on investment income and gains. This favorable tax treatment is a key driver for individuals considering Puerto Rico as a place to live, invest, and do business.

Lower Property Taxes

Compared to many places in the mainland United States, Puerto Rico offers significantly lower property taxes. This reduction further enhances the attractiveness of investing in luxury real estate on the island, allowing investors to enjoy high-value properties with lower ongoing tax obligations.

Sample Calculations: Purchasing a Property Under Act 60

Let's explore Act 60 through the lens of two distinct properties showcasing the program's potential financial impacts. These sample calculations for properties in San Juan and Rio Grande highlight these Puerto Rico tax benefits:

1. 555 Monserrate CONDOMINIO COSMOPOLITAN Unit: 1004

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The property listed at 555 Monserrate, Condominio Cosmopolitan Unit 1004 in San Juan, PR, is priced at $2,350,000. It's a luxury apartment featuring 3 bedrooms and 3.5 bathrooms, spanning 2,600 Sq. Ft., with amenities like high ceilings, marble flooring, and a modern kitchen. It offers stunning ocean views and Condado Lagoon, supported by 24/7 concierge services, security, an entertainment lounge, an infinity pool, a fitness center, and a conference room. It also includes hurricane-proof windows​​.

Let us assume a hypothetical calculation of potential savings and gains through Act 60 Puerto Rico tax incentives with this property:

  • Purchase Price: $2,350,000
  • Annual Property Tax in Puerto Rico: Approximately 0.7% (lower than many places in the mainland U.S.)
  • Income from Dividends and Interest: $100,000 annually
  • Capital Gains from Investment: $50,000 annually after 10 years
  • Charitable Contributions to the Puerto Rican Economy: $10,000 annually

Calculations

1. Property Tax: 0.7% of $2,350,000 = $16,450 annually

2. Income Tax Savings:

  • Federal tax rate for dividends and long-term capital gains can exceed 20% in the mainland U.S.
  • Under Act 60: 0% tax on dividends and interest, 5% on certain long-term capital gains
  • Annual Savings on Dividends and Interest: >$20,000

3. Capital Gains Tax: If applicable, significantly reduced (5% of $50,000 after 10 years = $2,500, compared to $10,000+ at mainland rates)

4. Annual Charitable Contributions: $10,000

2. Carr 968 KM.HM 2 BO. LAS COLES

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This property, located at Carr 968 KM.HM 2 BO. LAS COLES, Rio Grande, PR, is offered at $1,950,000, is a newly-renovated mountainside home includes 3 bedrooms, 3 full baths, 2 half baths, and spans 2,500 Sq.Ft. over a 0.42-acre lot. It features panoramic coastal views, a gourmet kitchen with state-of-the-art appliances, and a pool area designed for entertainment. The residence is near the Wyndham Rio Mar, providing non-residents access to resort memberships.

Let us assume a hypothetical calculation of potential savings and gains through Act 60 tax incentives with this property:

  • Purchase Price: $1,950,000
  • Annual Property Tax: Assuming a similar rate of 0.7%, although actual rates can vary.
  • Income from Dividends and Interest: $100,000 annually
  • Capital Gains from Investments: $50,000 annually after 10 years
  • Charitable Contributions: $10,000 annually

Calculations

1. Property Tax: 0.7% of $1,950,000 = $13,650 annually.

2. Income Tax Savings:

  • Assuming the same 0% tax on dividends and interest and 5% on certain long-term capital gains under Act 60.
  • Annual Savings on Dividends and Interest: Likely >$20,000

3. Capital Gains Tax: If applicable, the tax would be significantly reduced (5% of $50,000 after 10 years = $2,500).

4. Annual Charitable Contributions: $10,000

Long-Term Benefits and Considerations for Both Properties

Criteria

Description

Tax Savings Over 10 Years

Tax Savings Over 10 Years on dividends and interest alone could exceed $200,000, not accounting for compounding or investment growth.

Capital Gains Tax Savings

Depending on the specific timing and amount, substantial savings when compared to mainland rates.

Property Appreciation

Ownership of luxury real estate in a growing market could significantly increase net worth.

Initial and Recurring Costs

Including purchase price, annual property taxes, and mandatory charitable contributions.

Savings

Significant savings on Puerto Rican income tax for dividends, interest, and capital gains.

Note:

These simplified examples are a starting point for understanding potential financial implications under Act 60. The actual financial impact could vary based on many factors, including changes in tax laws and individual circumstances. Consulting with a tax advisor specialized in Act 60 is recommended for anyone considering such an investment.

Conclusion

Act 60 represents a transformative approach by Puerto Rico to enhance its economic competitiveness and attract investors and entrepreneurs through significant tax incentives, aiming to stimulate economic growth while offering substantial benefits to those willing to commit to the island as their home, particularly in the luxury real estate sector. At Christie's International Real Estate Puerto Rico, we understand the transformative potential of Act 60 for investors and entrepreneurs looking to explore the vibrant real estate market in Puerto Rico. Whether you're interested in buying, selling, or renting luxury properties, our expert team is dedicated to guiding you through the Puerto Rican tax incentives and the diverse portfolio of high-end properties that Puerto Rico offers.

Contact us and start your journey towards making a wise and profitable real estate investment in Puerto Rico today.

FAQs

Can non-U.S. citizens benefit from Act 60?

Yes, non-U.S. citizens can benefit from Act 60, provided they meet the criteria for becoming bona fide residents of Puerto Rico. While the tax incentives were designed with U.S. citizens in mind, especially regarding the exemption from federal taxes on Puerto Rican-sourced income, non-U.S. citizens who establish residency in Puerto Rico can also enjoy the local tax benefits. These include no taxes on interest, dividends, and certain capital gains, along with reduced property taxes. 

Are there any restrictions on the types of properties qualifying for Act 60 benefits?

While Act 60 encourages the purchase of residential property in Puerto Rico as part of the investment requirements, there are no specific restrictions on the type of residential properties that qualify for Act 60 benefits. This means investments can range from luxury condos in metropolitan areas to beachfront villas or mountain retreats. The key factor is that the property must be purchased as a personal residence, and the investor must comply with the residency and presence tests stipulated by Act 60. 

 

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