What Puerto Rico's Act 22 Means for Real Estate

April 13, 2015

Have you heard about Puerto Rico's Act 22? It's a relatively new law (enacted in January of 2012) that gives unbelievable tax savings to new residents. It's exciting news for Puerto Rico's economy and real estate market, and it's equally exciting for the millionaires and billionaires who can expand their business and increase their net worth dramatically by moving there.

What You Need to Know About Puerto Rico's Act 22

Puerto Rico is unique. It is technically part of the United States, so the residents are US citizens and passports aren’t required to travel there from the U.S.A. But since it’s an unincorporated territory (a.k.a. commonwealth), Puerto Rico gets the unique ability to make its own tax incentives. The latest is called Puerto Rico's Act 22, otherwise known as the Individual Investors Act.

Puerto Rico’s Act 22 was created to give the Puerto Rican economy a boost by attracting the empty nesters, retirees, and high-net-worth individuals who are fed up with paying so much in taxes on their earnings—especially those who make the majority of their income from capital gains. The law has a lot of parts, but here’s a brief rundown of who is eligible:

  • The individual needs to be a resident, meaning they do business there, bank there, and live there with their families at least 183 days out of the year.
  • The individual has to be a new resident to Puerto Rico (or at least not a resident since 1997).
  • The individual cannot have another tax home (a home close to a main place of business) outside of Puerto Rico.
  • The individual cannot have a closer connection to the US than Puerto Rico, meaning all of their personal belongings must be in Puerto Rico, their license must be issued by Puerto Rico, and if they are registered to vote, it should be for Puerto Rico’s district.

If all of those requirements are met, these are the benefits that Puerto Rico’s Act 22 offers:

  • No income tax on dividends earned in Puerto Rico
  • No income tax on interest earned in Puerto Rico
  • No income tax on capital gains (both short and long-term) accrued after the date of residency in Puerto Rico, until 2035.

How Does This Affect Real Estate in Puerto Rico?

Clearly, Puerto Rico’s Act 22 was designed to get people to move to the island—but more than that, it was crafted to give a boost to real estate in Puerto Rico. Think about it: What do people want when they move to the tropical oasis that is Puerto Rico? Luxury homes, of course. And what happens when a sudden influx of people want to buy luxury homes?

  • In order to meet the demand, new construction of luxury homes must take place, which introduces hundreds of new jobs.
  • With more luxury homes being built, the value of real estate in Puerto Rico will boom. Even the residents of Puerto Rico that have lived there for years will likely see a jump in their home’s value.
  • The opportunities for investing will be enticing, which will further drive the demand of luxury homes and their values.

Puerto Rico’s Act 22 is the true definition of a win-win situation: Investors get to save on their tax bill while the luxury homes market gets a much-needed boost.