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.
Mish
do you have to take rmd? do you have to pay federal tax on it? can you take more than rmd? do you have to pay federal tax on it? do you collect social security, get benefit of medicare?
Idiotic – I did no such thing. The responsibility is to pay all taxes owed. I advocate doing just that.
What this tax people forget to mention is the exemption on the sale of your real estate for a married couple $500k or a single person $250k on a primary residence.. You can still sell your assets today since the new tax law as not one been passed or two be implemented… Then move their and start repurchasing assets… the way the government is printing money like toilet paper I think stocks, crypto and potentially other assets will come down allowing for buying again… This is only my 2 cents… Also dont think Puerto Rico is the only country that is nice for taxes (i.e. Singapore and I sincerely doubt they will become a US State LOL)…
If Biden brings back the SALT deduction could a Red state then raise taxes, not spend the extra tax and then send that back to its’ citizens? Since the citizens have already taken the deduction it would be a net gain for the citizens and a gain for the state. The federal government would lose out but they voted it.
“I am pleased to help any way I can those who wish to avoid such taxes.”
Me too, and good luck to those who have the motivation and ability to make it work. As I said, the PR “solution” isn’t a good fit for me, because of my job or the nature of my investments.
Today, if I were starting out, I’d strongly consider the kind of work that allows one to be a “cyber nomad”.
I once came very close to moving to the USVI, going so far as to seek licensure there…..and one person I influenced actually did move there, and still lives there.
That was at a time when my life suddenly got very busy here with child-rearing and running my practice, which was taking off and growing a lot in those years. I decided to stay, for many good reasons.
I had friends back then who were live-aboard sailors, and I came to see that such folks live a life with a lot more freedom than most of us who are stuck in the rat race here in the US. The territories have pluses and minuses…..and you need to be able to adapt culturally, which is a big deal nobody mentioned so fat in these comments.
Anyone who is considering giving up US citizenship to avoid taxes should do a lot of due diligence. There are many scams out there run by unscrupulous people (whose names some of know but I won’t mention either).
I like Portugal as far as the opportunities for a cyber nomad, but I hardly ever see it mentioned. For crypto traders, it’d be awesome.
There used to be a lot of people touting South and Central America……but I’d be very careful there. I just talked to a guy here who sold out and is moving to Costa Rica….but he did it in stages. He spent a year down there just building a home, while his wife held down the business, before finally making the move.
I will most likely find a way to stay here and keep my taxes within reason. That’s one reason I want to build another house. Rural property taxes here are quite good if you can get a wildlife exemption on you property, which I have on mine.
And hopefully, I will stay a small enough fish to avoid the worst of the capital gains.
Biden better be careful. Certain tax loopholes are so popular, also….long standing and just expected….that he will shoot himself in the foot pretty fast if he changes too much too quickly.
Screwing around with capital gains has the potential to just kill the housing industry and make real estate tank….and I fully expect a backlash (in the form of a new kind of Republican base) that might vote Biden out handily after one term.
From this job opening posted recently for the IRS in Puerto Rico, it looks like there will be more enforcement of existing law that was likely not being enforced.
I know some people who moved there a number of years ago for the tax reasons. They seem to be doing ok, perhaps because they also travel extensively. I’m not sure if most people would do it, definitely need to weigh your life priorities against the monetary ones.
How Puerto Ricans Are Fighting Back Against the Outsiders Using the Island as a Tax Haven https://time.com/5955629/puerto-rico-tax-haven-opposition/
When France raised the top rate to 75%, actor Gerard Depardieu moved to Russia.
I doubt it was the tax. He was probably ensnared in a trap set by Putin and didn’t realize the money was coming from Russia. One day soon Trump will end up living there too.
Trump may be back in the White House.
Depardieu made it clear it was the taxes. He aid he had already paid plenty enough, already.
Exactly. If you hold are a US citizen, greencard holder or on any visa, you must file and pay any federal taxes you owe irrespective of where you live. So now this begs the question of how PR got around this. Looks like more of an enforcement issue then any law needing to be changed.
Again, this is a Puerto Rico exception that Congress made in order to help increase investment there.
I see a lot of clauses there open to interpretation. I think enforcement was probably lax under previous administrations.
Enforcement is not by the federal government in the territories. They have their own enforcement, and it has been, historically, very, very lax. This is why it was a tax haven long before these recent changes of the past few years in PR. In the territories, nepotism and graft are a way of life, or they have been, for a very long time. Who you are, who you know, and how you’re connected means a lot down there.
You’re making a million a year in capitol gains and you’re gonna live in Puerto Rico?
Not likely.
This is like a petulant little kid, saying “I’m gonna run away!”
I know one personally and he tells me there are dozens all living in the same section and I do not doubt it a bit.
With wage income there is a limit on how much one can shelter. Retirees with large assets are better off in tax free high yield muni bonds instead of the stock market to keep and add to their wealth. Close to 4% tax free and much less risk. Selling appreciated stocks has 50%+ taxes in Blue states and one still faces the risk of a 2000 or 2008 wipe out.
Not so easy for American business looking to shift income overseas either. There is something called transfer pricing and the IRS does go after.
By the way it’s going to be funny watching rich people get repeatedly blown away by hurricanes in these tax havens in the Caribbean. Florida too for that matter. No one should feel sorry for hedge funds and the like who did very little to earn their wealth.
The nice thing about hedge fund comp is that it’s pre-arranged contractually. You might think they do very little for it. I recommend you not invest in them, then, and allow others to exercise their differing views.
A federal AMT would prevent any person or corporation from escaping. PR wouldnt be exempt.
It’s a proposal. Ask for a lot higher than you want and you will get what you want. I predict capital gains and income get taxed at same rates. This is fair. No way capital gains should be 15 or 20% and income taxes should be 35% for the same dollar in a bracket.
Money manager and economist John Hussman:
“As for capital gains taxes, the subtle bifurcation of the word “capital” has always fascinated me as an economist. There is a great deal of economic theory that suggests, correctly I think, that reducing the tax burden on capital investment can have pro-growth effects. But this research emphatically refers to “capital” in the real, tangible, productive sense. It does not refer to fluctuations in the value of securities. I am all for significant tax credits for real capital investment and R&D, which would be passed on to shareholders as an increase in the returns to productive investment activities. But it is a stretch to use the economic research on real investment and quietly redefine “capital” as financial capital in order to reduce taxes on security price fluctuations. Wages are income. Capital gains are income.”
“Unhappy with Biden’s tax proposals? So are many others. Let’s discuss moving offshore.”
Since only .4% of the population would be affected with take just about everyone involved to create “many”.
Well, there’s the group of imbeciles who believe that even though right now, they are getting f***ed by their health insurance companies, banks and other corporations, the wealth will eventually trickle down to them!
Puerto Rico should be a state. It suffers greatly for it with unfair legislation such as the Jones Act and an inability to get Federal Resources. When the need arises its treated like a 3rd world country.
Republicans do not want statehood because they want to keep as much power as possible knowing that its in the Senate they benefit from having disproportionate representation. This is as nefarious as a 3/5’s solution. The majority of the island of Perto Rico votes Democrat so the Democratic party is merely acting in the island’s best interest. I’d say the arguments for statehood are far stronger than D.C’s
Puerto Rico is one of many US territories. Others include Guam, US Virgin Islands, and American Samoa. As Mish indicated, the current call for PR statehood is all about changing the balance of the Senate. My guess is that when PR can be paired with another new state (as was done with Alaska and Hawaii) that won’t change the balance of Dems and Republicans in the Senate it will happen.
Or preventing a change in power. Or put simply denying representation
Puerto Rico has been a US territory since 1899. Why is it that suddenly after 122 years it is now urgent to give it statehood instead of to treat it like all the other territories? I think we all know the answer: the Democratic Party cannot even convince its own Senators to vote for all of its radical proposals, so it needs to find a way to increase its majority in the Senate.
Well there was this hurricane, maybe you missed it, the island was devastated, the president came blamed them and threw paper towels. Must have been Bounty, the quicker pickerupper
What year, exactly, was Puerto Rico moved into the path of frequent hurricanes? Asking for Dominican and Cuban friends.
Ah yes, the hurricane. The reason Puerto Ricans had a disaster on their hands after the hurricane was 110% (or more) because of the DEMOCRATS who hold political power on the island. They made their own bed.
Because statehood should have come long ago and so it is about time that it happens.
“It suffers greatly for it with unfair legislation such as the Jones Act” which would not change if Puerto Rico became a state.
Disproportionate representation in the Senate is a feature, not a bug. It was designed that way.
Do people still pay taxes? I feel pretty rich but only paid $1700 in estimated tax last year and got $111 back. I also built a fabulous new water view house for cash and bought a 50k new car for cash. I have no debts, prop taxes are 3k/year, all electric house averages $150 month in energy cost, wouldn’t have much trouble just living on Social Security. What a Country….
This is in Washington State so no Stae income tax and our Counties sales tax is only 8.3%
forgot about the no editing: that would be “State” and “County’s”
Last year I paid 85k in taxes… and I too live in Washington.
Screw me for being productive.
I’m productive as well, I built 2 houses in the last four years almost entirely by myself and sold a tax free personal residence twice, one 25 months ago and one last week, exempting about 800k in capital gains, most of which was in fact my labor. Seems like a tax scam but it’s perfectly legal
Nice.
The real challenge in this country is to figure out how to USE the tax system to your own advantage. Congratulations on winning the game.
There are two kinds of commenters here. The kind that get that, and the kind who want to solve society’s problems, Raising more tax…..especially on others, seems like a no-brainer to them…..but it doesn’t ever work.
It just becomes a positive feedback loop that only goes one way.
There is always one problem that, by definition, they can’t run away from. And that is – wherever these rich pricks go, they will have the locals hating them within a few years.
Isn’t envy ugly?
Greed is far uglier.
You don’t have to be a prick just because you’re rich… but it does often seem to work out that way.
Yep I know some Z-ers who are thinking of moving there to avoid taxes on their bitcoin. Just pay the fucking tax.
Excuse me……..EXCUSE ME!!!!!………
but why would any tax dodging trillionaire welfare queen like Zuckerburg, Google, Amazon, GE, Boing, Hedge Funds, Wall Street, Just About Any And All US conglomerates want to move offshore to avoid “tax proposals” when they’ve already done so?
Apple has a hundred billion dollar “offshore” tax dodging hedge fund in Nevada.
Mish….please explain why Apple or any other Welfare Queen subsidized by American taxpayers like You and Me, that is illegally dodging taxing and practicing Socialism for The Rich – paid for by YOU and ME…
Would want to offshore their profits “because Biden”
WHEN THEY HAVE ALREADY BEEN DOING THIS FOR DECADES!!!!!!!!!@!
In the 70s people used to move TO the states to avoid taxes…
Wouldn’t it be funny if PR became a new state?
And US citizens owe taxes on income regardless of where they live in the world.
Yep
however, there is a specific IRS rule which carves out tax residents of PR, at the moment.