Puerto Rico Act 60

Classification B, legitimate, commonly abused. Real tax law with a real benefit. Promoters break it.

Sold as: "move to Puerto Rico, pay 0 percent on capital gains and 4 percent on your business", "Act 60 decree", "the last legal tax haven for Americans"

Moving to Puerto Rico does not retroactively make your pre-move gain Puerto Rico source income. That single misunderstanding is the number one failure the IRS is auditing.

The pitch

Move to Puerto Rico under an Act 60 decree and pay 0 percent on capital gains and 4 percent on your business income. The last legal tax haven for Americans.

What it costs you if it is wrong

Pre-move appreciation split-sourced back to the United States under Reg. 1.937-2 is taxed as U.S. source income, which is usually the entire benefit. A residency failure under Sec. 937 unwinds the Sec. 933 exclusion for the year. The IRS identified roughly 100 high-wealth individuals for investigation with the expectation of criminal referrals, and one taxpayer has already pleaded guilty to filing false documents about backdated elections and residency timing.

Red flags

The plan is to move and then sell an asset that appreciated for years
Nobody applied the Reg. 1.937-2 lookback to pre-move appreciation
Documentation of the Sec. 937 three-part test is thin
Services will be performed off-island but sourced to Puerto Rico
A pass-through is said to convert the character of pre-move gain
A document is being dated earlier than it was signed

Questions to ask the person selling this

1How is my pre-move appreciation sourced under the Reg. 1.937-2 lookback?
2What documentation proves the Sec. 937 three-part test: day counts, tax home, closer connection?
3Where will I actually perform the work that generates my fees?
4Is Form 8898 being filed for the year of the move?
5Does any part of this rely on a pass-through changing the character of pre-move gain?

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