Puerto Rico Act 60 Analysis: How It Works, Who It Fits, and the Catch

How it works, in plain English

Puerto Rico is a U.S. territory with its own tax system. Under IRC 933, a U.S. citizen who is a bona fide resident of Puerto Rico for the whole tax year excludes Puerto Rico-source income from federal gross income. Puerto Rico then taxes that income under its own law. Puerto Rico's Incentives Code (Act 60 of 2019, which absorbed the older Acts 20 and 22) offers a resident individual investor decree that taxes qualifying interest, dividends and capital gains accrued after the move at a preferential rate.

In March 2026 Puerto Rico enacted Act 38-2026. It extends the resident investor program to 2055, keeps the 0% rate through 2035 for people who apply for a decree by December 31, 2026, and sets a 4% rate for applications filed from January 1, 2027, along with a requirement that new applicants were not Puerto Rico residents for the prior six years. Decree holders also face ongoing conditions, including buying a residence in Puerto Rico within two years, an annual charitable donation and annual reporting and fees. Confirm the current terms with Puerto Rico counsel before relying on any of them.

The 10-year rule for gain you already have

This is the part most pitches skip. Under Treas. Reg. 1.937-2(f)(1) (building on section 1277(e) of the Tax Reform Act of 1986), if you were a U.S. citizen or resident in any of the 10 years before the year of sale, gain on stock, securities and similar investment property you owned before becoming a bona fide resident is not Puerto Rico-source income. It stays U.S.-source and federally taxed.

You can elect to treat only the post-move portion as Puerto Rico-source:

• Marketable securities: appreciation measured from the market value on the first day of your Puerto Rico holding period.
• Other property (for example, stock of your private company): the gain is split by days, Puerto Rico days over your total holding period.

Separately, gain on U.S. real estate is U.S.-source no matter where you live, and much of an asset sale of a U.S. operating business is U.S.-source too. Puerto Rico also applies its own rules to pre-move appreciation, generally outside the decree's 0% or 4% rate.

Bona fide residence: the tests

The exclusion only works if you are a bona fide resident under IRC 937(a) and Treas. Reg. 1.937-1. You must meet all three:

1. Presence test, most commonly at least 183 days in Puerto Rico during the year (the regulations offer alternatives, such as no more than 90 days in the U.S.).
2. Tax home test: your principal place of business, or your regular place of abode, is in Puerto Rico.
3. Closer connection test: no closer connection to the U.S. or a foreign country than to Puerto Rico, judged by home, family, belongings, driver's license, voter registration, banking and similar facts.

You file Form 8898 for the year you become or stop being a bona fide resident. IRS Publication 570 walks through the tests. A home kept in California, children in school in Texas or a business run day to day from New York can sink the claim.

Worked example: the founder who moves two years before selling

Assumptions (labeled, from the Big Sale Tax engine): married filing jointly, 2026 federal tables (Rev. Proc. 2025-32), $5,000,000 long-term gain on private company stock, no other income. The founder held the stock 12 years total, the last 2 as a bona fide Puerto Rico resident, and makes the days-based election.

The federal bill falls by about $198,000 in this example, before the cost of moving, the decree fees and donations, any Puerto Rico tax on the pre-move portion, and the life change itself. The 3.8% tax still applies to the U.S.-source share because bona fide residents who must file a U.S. return remain subject to it on non-excluded income under Treas. Reg. 1.1411-2(a)(2)(vi). The math improves only as the post-move share of the holding period grows, or after the 10-year window passes.

IRS stance and audit risk

Act 60 is legal, and IRC 933 is statutory. The IRS's focus is on people who claim it without qualifying. On January 27, 2021 the IRS Large Business and International division announced a compliance campaign on Puerto Rico Act 20/22, which remains on its list of active campaigns. It targets two issues: individuals who do not meet the bona fide residence requirements of section 937, and residents who do qualify but report U.S.-source income (such as pre-move gain under the 10-year rule) as Puerto Rico-source. The IRS has also published training material on Acts 20 and 22. Expect travel records, phone location data, club memberships and where your family lives to be examined.

Costs and fees

Direct costs include the decree application and annual reporting fees, the required annual charitable donation, buying a residence in Puerto Rico, Puerto Rico and U.S. return preparation, and legal fees for the decree. The indirect cost is the move: a real change of home, family logistics and business management. Leaving Puerto Rico later also has consequences, including a new Form 8898 and possible state tax claims when you return to a state.

How it compares with a Section 453 installment sale

A Section 453 installment sale does not require you to move. It spreads the gain over the years the buyer pays. On the same engine assumptions, $5,000,000 of gain taxed in one year costs $1,134,980 federal, while $500,000 of gain a year for ten years costs $64,835 a year, $648,350 in total, at constant 2026 tables and before the ordinary tax on note interest. The seller manages buyer credit risk with a down payment, a first-position lien or UCC lien, a personal guarantee from the buyer's owners and firm note terms.

The two can interact, but carefully: do not assume that installment payments on a sale made before the move become Puerto Rico-source just because you receive them after moving. Sourcing of a pre-move sale is a technical question for your CPA and Puerto Rico counsel. For a move from a high-tax state, see also changing state residency before a sale.

How Hans helps

The $5,000 Big Sale Tax Analysis models the part of your gain that would still be U.S.-taxed after a move, next to an installment sale, a 1031 exchange, Opportunity Zones and the other paths, so the decision rests on real numbers. Start with the estimator or see what the analysis covers.

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