Puerto Rico’s Act 60 offers significant tax incentives to U.S. citizens who become residents of Puerto Rico. While the benefits are substantial, there are several widespread misconceptions about how these incentives work, especially regarding real estate, U.S. investment income, and residency requirements.
This article aims to clarify some of the common misunderstandings and provide a preview of other important considerations.
Common Misconceptions About Act 60
- Real Estate Benefits Are Often Misunderstood
Many believe that purchasing real estate in Puerto Rico automatically qualifies them for tax incentives or that all real estate income is tax-free. In reality, not all real estate transactions or income streams are covered under Act 60.
- Interest and Dividends from U.S. Companies
Another misconception is that interest and dividends from U.S. companies are tax-exempt for Puerto Rico residents under Act 60.
However, only Puerto Rico-sourced income is exempt from U.S. federal income tax. Interest and dividends from U.S. companies may still be subject to U.S. taxation, depending on the source and structure of the income.
- Residency Requirements vs. Source of Business Income
Some assume that simply meeting the minimum residency requirement is enough to benefit from the tax incentives.
In fact, the source of the business income is critical. Only income genuinely sourced from Puerto Rico qualifies for the full benefits, and the IRS scrutinizes both residency status and the true origin of income.
- Puerto Rico Forced Heirship
Different that in the US Puerto Rico’s forced heirship law dictates that direct heirs (children, spouse, and parents) are entitled to a portion of an estate, even if a will states otherwise.
For this reason, we recommend all our clients to have a will in Puerto Rico.
Conclusion
Act 60 presents valuable opportunities, but understanding the realities—especially around real estate, U.S. investment income, and residency rules—is crucial to avoid costly mistakes.
If you’re considering a move or investment, consult with qualified professionals to ensure you’re fully informed and compliant.