Why the Puerto Rico Tax Haven Is Running Out of Time

Written by Rob Cordasco of Cordasco & Co., in Partnership with Select Advisors Institute

Your Tax Haven Dreams Are Running Out of Time

So, you want to pay zero percent on your capital gains? Join the club. Unfortunately for late-to-the-party tax avoiders—excuse me, “tax optimization strategists”—that dream comes with an expiration date that’s approaching faster than my blood pressure. Puerto Rico’s Act 60 tax haven is about to slam the door on the free ride, and if you’re not in by December 31, 2025, you’ll be paying for it. Literally.​

The Greatest Tax Deal You’re About to Miss

Let’s start with what makes wealthy people pack their bags and head to the island of enchantment: zero percent tax on passive income. That’s right—no taxes on capital gains, dividends, interest, or even your cryptocurrency gains. It’s like the IRS took a permanent vacation and forgot to tell anyone.​

Puerto Rico’s Act 60 (the lovechild of the former Acts 20 and 22, which apparently needed couples therapy) offers this absurdly generous deal because of Puerto Rico’s unique status as a U.S. territory with its own tax jurisdiction. Thanks to Section 933 of the Internal Revenue Code, bona fide residents of Puerto Rico are exempt from U.S. federal income tax on Puerto Rico-sourced income. It’s the tax equivalent of finding a legal loophole the size of a cruise ship.​

But here’s where it gets spicy: House Bill 505, passed in 2025, is about to ruin everyone’s fun. Starting January 1, 2026, new applicants will face a 4% tax rate on their previously tax-free passive income. Sure, 4% is still better than the mainland’s rates, but going from zero to four percent is like being promised a free yacht and getting a dinghy instead.​

The Grandfathering Clause: Your Golden Ticket (That Expires at the end of 2025)

Here’s the good news for procrastinators with money: if you submit your Individual Resident Investor decree application on or before December 31, 2025, you’ll be grandfathered under the existing 0% rate for the life of your decree. That’s potentially 15 years of tax-free passive income, with the option to extend for another 15 years

The kicker? The application submission date is what matters, not when you actually move or when your decree is approved. This means you can file by December 31, 2025, and take your sweet time relocating in 2026, all while locking in that sweet, sweet 0% rate.​

The Fine Print: You Actually Have to Live There

Before you start Googling “Puerto Rico real estate” and planning your tax-free future, let’s talk about the minor inconvenience of actually becoming a resident. And no, buying a condo and visiting once a year won’t cut it. The IRS is onto that trick.​

To qualify, you need to pass the bona fide residency three-part test:

1. The Presence Test: You must spend at least 183 days per year in Puerto Rico. That’s six months. Count them. The IRS will. Alternative options exist, like spending no more than 90 days in the U.S. while earning less than $3,000 there, but let’s be honest—if you’re chasing Act 60 benefits, you’re probably making more than three grand stateside.​

2. The Tax Home Test: Your principal place of business must be in Puerto Rico. No, you can’t run your hedge fund from Manhattan and claim your beach house in Dorado as your “tax home.” The IRS has heard that one before.​

3. The Closer Connection Test: This is where it gets subjective and slightly ridiculous. The IRS evaluates 11 factors to determine whether you have a “closer connection” to Puerto Rico than to the mainland, including where your driver’s license is from, where you’re registered to vote, where your family lives, which social clubs you belong to, and presumably whether you say “bendición” to elderly strangers.​

Bottom line: if you’re keeping one foot on the mainland and one in San Juan, the IRS will notice—and they won’t be amused.

The Real Estate Commitment (Or: How They Make Sure You’re Serious)

Think you can rent forever and avoid putting down roots? Think again. Act 60 requires you to purchase residential property in Puerto Rico within two years of obtaining your tax decree. This property must be your primary residence for the duration of your decree, held in your name (or jointly with your spouse).​

Translation: Puerto Rico wants you to actually live there, not just use it as a tax dodge with a nice view. Shocking, I know.

What Happens to Your Gains Before You Move? (Spoiler: Uncle Sam Still Wants His Cut)

Here’s the buzzkill for anyone sitting on massive unrealized gains: the U.S. government isn’t stupid enough to let you dodge taxes on appreciation that occurred before you moved. Enter the 10-Year Rule.​

For marketable securities (stocks, bonds, your Tesla shares), you can split the gain:

Pre-move appreciation: Subject to U.S. capital gains tax
Post-move appreciation: Puerto Rico-sourced, 0% tax (if grandfathered)​

Example time: You bought stock for $100,000. On your move date, it’s worth $500,000. You later sell it for $1,000,000. The $400,000 gain that accrued before your move? That’s Uncle Sam’s territory. The $500,000 you made after relocating? Tax-free, baby.​

But wait, there’s more bad news for private equity bros: for non-marketable securities (private company interests, real estate), gains are allocated using a “days-of-ownership method,” which can create distortions if your assets appreciated disproportionately during one period. Sounds fun, right?​

The good news? After 10 years of bona fide residency, all gains—including pre-move appreciation—become Puerto Rico-source and qualify for favorable treatment. So if you’re willing to commit to island life for a decade, eventually the slate gets wiped clean.​

For the Business Owners: The Export Services Program

If you’re not just sitting on piles of investment assets but actually run a business, Puerto Rico has another treat for you: the Export Services Program (formerly Act 20). This applies to businesses providing services to clients outside Puerto Rico, and it comes with its own set of ridiculous tax benefits:​

• 4% corporate tax rate on eligible export service income (compared to 21% federal rate)

• 100% tax exemption on dividend distributions to Puerto Rico resident shareholders

• 75% exemption on property taxes

• 50% exemption on municipal license taxes​

The catch? At least 80% of your gross income must come from services provided to clients outside Puerto Rico, and you actually have to perform those services in Puerto Rico. So if you’re an accountant serving U.S. clients, you can do it—but you need to conduct all your Zoom calls, research, compliance work and analysis from your San Juan office, not your Park Avenue penthouse.​

Pro tip: Structure your operations to eliminate U.S.-source income entirely. Travel to the mainland should be limited to “brief client meetings or marketing activities” that don’t constitute a U.S. trade or business. Translation: show up, shake hands, get back on the plane.​

The Cost of Paradise (Beyond Rent and Piña Coladas)

Let’s talk fees, because nothing in the tax world is truly free:

Individual Resident Investor Program:

Application fee: $5,005One-time acceptance fee: $105Annual compliance filing fee: $5,005Annual charitable donation requirement: $10,000 (to two Puerto Rico nonprofits)​
So, you’re looking at about $15,000 in annual ongoing costs, not counting your CPA, lawyer, and compliance team. Still cheaper than your actual tax bill would be on the mainland, but worth noting.

Export Services Program:
Application fee: varies by business sizeAnnual compliance filing fee: $505​
The Compliance Nightmare (Or: How to Avoid the IRS Audit From Hell)

Here’s the thing that separates successful Act 60 participants from those who end up in tax court: documentation. The IRS has specifically launched a campaign targeting Act 60 participants, and they’re not messing around, or they won’t be when they return to office.

You need to maintain meticulous records including:

• Boarding passes and flight itineraries (every single one)

• Passport stamps

• Hotel receipts

• Utility bills

• Detailed travel logs

• Bank statements

• Membership records for Puerto Rico organizations

• Evidence of family ties

• Basically, your entire life on paper​

Miss the 183-day requirement? Audit. Fail to demonstrate closer connection? Audit. Forget to file your annual compliance report by November 15? Decree suspension.​

Annual compliance obligations include:

• Puerto Rico income tax returns (due May 15)

• Annual compliance report (due November 15)

• $10,000 charitable donation (by December 31)

• Maintaining all residency factors throughout the year​

And yes, you still have to file a U.S. federal tax return reporting any U.S.-source and foreign-source income. Puerto Rico-source income doesn’t get reported on your U.S. return (thanks to Section 933), but everything else does.​

The Timeline: 

If you’re serious about this, here’s what you need to do immediately:

By December 31, 2025:

• Engage Puerto Rico tax counsel (like, yesterday)

• Establish a temporary Puerto Rico address

• Open a Puerto Rico bank account

• Gather documentation (passport, Social Security card, criminal background check)

• Submit your Individual Resident Investor application with $5,005 fee

• Consider submitting an Export Services application if you run a business​

Processing time: 10-12 months from submission to final decree issuance. But remember, the application submission date is what locks in your grandfathered status, not the approval date.​

Relocation Plan:

• Move before July 1 to qualify for the entire year under the “Year of Move” rule

• Establish your tax home in Puerto Rico

• Start counting those 183 days

• Begin your property search (you have two years, but don’t push it)

• Transfer your life, belongings, and dog to the island​

The Bottom Line (Or: Should You Actually Do This?)

Look, Act 60 is an extraordinary tax benefit that’s about to become significantly less extraordinary. If you have substantial passive income, you’re willing to actually relocate to Puerto Rico (not just pretend to), and you can handle the compliance requirements without having a nervous breakdown, then filing by December 31, 2025, is a no-brainer.​

But if you’re thinking this is some kind of loophole where you can claim Puerto Rico residency while spending most of your time in Miami, Manhattan, or Monaco—the IRS would like a word with you, and it won’t be a friendly one.

The difference between 0% and 4% on substantial passive income is life-changing money. The difference between doing this correctly and screwing it up is the difference between tax optimization and tax fraud. Choose wisely.

And whatever you do, don’t miss that December 31 deadline.

Now if you’ll excuse me, I need to go count how many days I’ve spent in various jurisdictions this year. For completely unrelated reasons, of course.

Select Advisors Institute is not a tax preparation or accounting firm and does not provide tax or legal advice. The firm operates as a fractional family office and strategic advisory partner, helping clients coordinate their wealth, advisors, and family systems. Tax, legal, and accounting decisions should always be made in consultation with qualified professionals such as Cordasco & Co.

A word from Select Advisor:

If you have any of the following questions, reach out:

Q: What exactly is Puerto Rico’s Act 60, and why is everyone suddenly talking about it?

Q: How does the 0% tax rate actually work for U.S. citizens who move to Puerto Rico?

Q: Is it really legal to pay no capital gains tax if you relocate?

Q: When does the current 0% tax benefit expire, and what happens afterward?

Q: What does the new 4% tax rate mean for investors applying after 2025?

Q: Can I still qualify if I file my application before December 31, 2025 but move later?

Q: What are the exact residency requirements to become a bona fide Puerto Rico resident?

Q: Do I really have to live there half the year, or are there exceptions?

Q: What’s the 10-Year Rule, and how does it affect capital gains before and after the move?

Q: How does Puerto Rico treat businesses under the Export Services Program (Act 20)?

Q: What kind of businesses qualify for the 4% corporate tax rate?

Q: What are the real costs—fees, donations, compliance filings—of maintaining Act 60 status?

Q: How closely does the IRS monitor Act 60 participants, and what triggers audits?

Q: What happens if you fail to meet the 183-day rule or other compliance tests?

Q: Is the Puerto Rico tax haven still worth it for high-net-worth individuals in 2025?