Puerto Rico Too Good to Be True?
That's the question of the day. And the answer is "it depends".
If you are willing to live in Puerto Rico and can do business there, then the short answer is yes, go for it.
If you think you can escape capital gains taxes just by moving, the answer is a lot more complex.
Slash Your Taxes To Zero? Not Exactly
Robert Wood a tax contributor to Forbes addresses the above questions in Move To Puerto Rico, Slash Your Taxes To Zero? Not Exactly
Puerto Rico hopes to lure American mainlanders with an income tax of only 4%. Legally avoiding the 37% federal rate and the 13.3% California (or other state) rate sounds pretty good. What’s more, there is no tax on dividends, and no capital gain tax in Puerto Rico.
However, some big cautions are in order. First, forget about easily avoiding U.S. tax on the appreciation in your assets before you move. If you move with appreciated stock, bitcoin or other property, and then sell, all that pre-move appreciation is still subject to U.S. tax. Only your post-move appreciation will be subject to the special tax rules in Puerto Rico. In fact, to escape U.S. tax on all of the pre-move appreciation, you generally must wait a full ten years after you move. That is hardly a quick fix. What about selling your U.S. real estate? That will always be U.S. source income. That means it is fully taxed in the U.S., even if you move to Puerto Rico and wait ten years before selling.
There are other fundamentals about the rules too. First, as with any move, you have to actually move! Your tax home—your real home—must be in Puerto Rico. Remember, just like any move from one state to another, it has to be real. Try to avoid messy facts that don’t look like a permanent move. If possible, sell your home, move your family, sever connections to your old local clubs, and so on. After all, if you are later ruled not to be a Puerto Rico resident, the IRS is back in the picture asking for back taxes, penalties and interest.
Puerto Rico Is Perfect For Whom?
If you are willing to move to Puerto Rico, and live there at least 183 days a year, then it is a very good solution for financial professionals, stock traders and anyone else who can conduct business online or over the phone.
One would not have to renounce citizenship or do anything else drastic.
I know prominent people, one whose name nearly all my readers would instantly recognize who did exactly that.
I believe he has been there for 10 years now which means all accumulated capital gains are now at a 5% long-term rate.
Not a Quick Capital Gains Fix
For those seeking to avoid capital gains, current long-term capital gains are 0% but only after the move.
Also consider even more detailed information by DC Tax attorney Peter Palsen in Tax-Weary Americans Find Haven in Puerto Rico.
New qualifying residents have 100% tax exemption from Puerto Rico taxes on all dividend and interest income and long-term capital gains accrued after becoming a qualifying new resident.
As for prior unrealized capital gains, the statute provides that:
The total net long-term capital gain generated by a resident individual investor related to the appreciation of the securities owned by such resident individual investor before becoming a resident of Puerto Rico, which appreciation is recognized ten (10) years after he/she became a resident of Puerto Rico and before January 1st, 2036, shall be subject to a five percent (5%) tax, in lieu of any other tax imposed under the Code.
Palsen provides examples in his article and even a phone number if you wish to contact him.
Whether or not one can escape taxes by moving to Puerto depends on your purpose, current income, and for capital gains avoidance, how long you are willing to commit to living there.
Puerto Rico a State?
This tax haven dies on the vine as soon as Puerto Rico becomes a state.
Democrats desperately want to make Puerto Rico a state, not for the benefit of Puerto Rico, rather to pick up two more Senate Seats.
For investment purposes, Puerto Rico is doing what it is doing on purpose. Those are the competing forces.
Net Capital Gains Tax Would Approach a Whopping 60% Under Biden's Proposal
In case you missed it, please consider the post on which this one is based: Net Capital Gains Tax Would Approach a Whopping 60% Under Biden's Proposal
I am pleased to help any way I can those who wish to avoid such taxes.