Puerto Rico Act 60 for Individual Investors: How Chapter 2 Works in 2026

Puerto Rico Act 60 for Individual Investors: How Chapter 2 Works in 2026

Puerto Rico Act 60

Chapter 2 of Puerto Rico Act 60 takes capital gains and dividends to a 0% rate for bona fide residents. The protection is real, but it only covers gains earned after you move, and the regime tightens for new applicants starting January 1, 2027.

Formerly known as Act 22, Chapter 2 of the Puerto Rico Incentives Code is one of the most powerful tax structures available to US citizens. Bona fide PR residents pay 0% on Puerto Rico-source capital gains and dividends, and IRC §933 excludes that same income from the federal return. Together, that means a US citizen can realize a large gain and keep effectively 100% of it.

There are real catches. The 0% rate does not apply to appreciation that built up before the move. The decree carries an annual filing fee and a charitable contribution. And under HB 505 / Act 38-2026, applications submitted on or after January 1, 2027 will be subject to a 4% PR rate instead of 0%.

This guide covers what Chapter 2 actually does, the appreciation trap that catches every new decree holder, the real annual cost, the December 2026 deadline, and how to think about whether the move is worth it for your specific situation. For the broader Act 60 program, see our Puerto Rico Act 60 strategy hub.

What Chapter 2 Actually Does

The decree, technically called the Resident Individual Investor decree, gives bona fide Puerto Rico residents a flat 0% rate on three types of investment income: long-term capital gains from Puerto Rico-source assets, qualifying dividends from Puerto Rico-source corporations, and interest from Puerto Rico-source accounts and instruments. The federal side is handled by IRC §933, which excludes PR-source income from a US citizen’s gross income for the year. The two pieces work together to take the combined federal and territorial bill to zero on qualifying income.

The headline math is striking. A $1 million long-term capital gain that would normally hit a top-bracket US filer at 20% federal long-term capital gains plus 3.8% net investment income tax, before any state tax, ends up costing $238,000 in federal tax alone. Under a properly structured Chapter 2 decree, that bill drops to $0 for the qualifying portion of the gain. State taxes on the move-from state are also avoided, since PR is no longer a US state for state tax purposes.

“Qualifying” is the operative word. The 0% rate covers Puerto Rico-source income, defined under 26 CFR §1.937-2. Income that doesn’t satisfy the source rules stays on the federal side and is taxed normally, regardless of where you live.

The Pre-Move Appreciation Trap

Almost every new Chapter 2 prospect arrives with the same mental model: “If I move to Puerto Rico before I sell, the 0% rate covers all my gain.” That is wrong, and the wrong assumption is the most expensive mistake in the program.

The 0% rate only applies to appreciation that occurs after you become a bona fide PR resident. Built-in gains on assets you already held before the move are generally treated as US-source under §1.937-2 and remain fully taxable on your federal return at standard long-term capital gains rates. Moving the day before the sale does not flip the source character of pre-move appreciation. The federal government still gets paid on the historical growth.

For marketable securities (publicly traded stocks, bonds, ETFs), Treasury Regulation §1.937-2(f)(1)(vi) lets you elect to split the gain based on the asset’s fair market value on the first day of bona fide residency. Pre-move appreciation (basis to residency-day FMV) stays US-source and remains federally taxable. Post-move appreciation (residency-day FMV to sale price) qualifies as PR-source and gets the 0% rate plus §933 federal exclusion. The election is what makes Chapter 2 actually work for stockholders. Without it, the default rule treats the entire pre-move gain as US-source.

For non-marketable property (real estate, business interests, partnership interests, private equity), the allocation is pro-rata over the entire holding period. The PR-source portion equals the proportion of days that occurred after residency. A 12-year hold with 1 year of PR residency would put only about 1/12 of the gain in the 0% bucket. That usually produces a less favorable result than the marketable-securities election.

The practical implication is timing. The 0% rate is most valuable on future appreciation, gains that have not yet happened, on assets that are either acquired after the move or held long enough for the post-move portion to dominate.

Same $1M gain. $238,000 federal tax vs $0. The variable is when the appreciation happened relative to the residency start date.

Who Qualifies: The Bona Fide Residency Tests

You qualify for Chapter 2’s federal §933 exclusion only if you are a bona fide PR resident for the year, as defined by IRC §937. The decree itself is granted by Puerto Rico’s Department of Economic Development. The federal exclusion is granted by the IRS, separately, based on three tests: a presence test (generally 183 days), a tax home test (your principal place of business has to be PR), and a closer connection test (your personal, family, and economic ties point to PR).

Each test is independent, and failing any one breaks bona fide residency for the year regardless of how strongly you pass the others. Most audits pivot on the tax home test, which catches remote workers who keep US W-2 jobs after moving. The full residency guide walks through the mechanics, the audit-file documentation, and the failure modes.

The Real Cost of Holding the Decree

Chapter 2 is not a one-time election. It carries fixed annual costs that have to be modeled into the breakeven before anyone moves. Per Puerto Rico law, decree holders pay a $5,000 annual filing fee with the Government of Puerto Rico, plus a $10,000 annual charitable contribution, and how it has to be divided is unsettled on the face of the statute. Section 6020.10(b) directs $5,000 to organizations working to eradicate child poverty in Puerto Rico that appear on a list published each year by a joint legislative commission, $2,500 to another qualifying nonprofit not on that list, and $2,500 to the Fondo Especial para la Igualdad Social. The same provision then states that nothing prevents the entire contribution going to listed organizations. Both sentences are in force, so document what you gave and to whom rather than relying on a clean rule.

That’s $15,000 a year in direct costs before any compliance work. On top of that, Chapter 2 clients carry ongoing federal compliance (Form 1040 with §933 exclusion, residency documentation, FATCA/FBAR if applicable) and ongoing PR-side compliance (Forma 482 individual return and the annual decree report, which we file in-house). The federal side and the PR side are two separate bodies of work, but they no longer take two firms. Hiltzik is a US CPA authorized to file Puerto Rico returns, and handles both the federal filings and the territorial work in-house.

The Deadline That Changes the Math

HB 505 / Act 38-2026, signed by the Puerto Rico Governor in March 2026, restructures Chapter 2 for new applicants. Applications submitted by December 31, 2026 lock in the existing 0% Puerto Rico rate on capital gains, dividends, and interest. Applications filed on or after January 1, 2027 face a 4% Puerto Rico rate on that same income, plus two new eligibility hurdles: a six-year non-PR residency lookback before applying, and an obligation to register a PR primary residence in the Property Registry within two years of receiving the decree. Existing decree holders are grandfathered.

The 4% rate is still preferential, and federal §933 exclusion still applies on top of it, so the federal side stays at zero either way. But on a multi-year, multi-million-dollar gain plan, the difference between filing in 2026 and filing in 2027 is roughly 4% of every qualifying gain over the life of the decree. On a $5 million gain that’s $200,000 in PR tax that would not have been owed under the old rule. The program itself was extended through 2055, but the 0% rate was not. Decrees issued on applications filed by December 31, 2026 carry 0% on Puerto Rico-source capital gains through December 31, 2035. Applications filed from January 1, 2027 forward carry 4% — and that 4% is what runs to 2055. The window to apply under the cleaner rules is what’s closing.

When Chapter 2 Is Worth It (And When It Is Not)

The decision is rarely about the 0% rate alone. It’s about whether the qualifying gains are large enough, the post-residency holding period is long enough, and the federal side of the structure is robust enough to survive an IRS examination, to clear the relocation cost and the ongoing decree obligations.

The rough rules of thumb we use on the discovery call: $500,000 in expected qualifying gains over five years is the floor where Chapter 2 starts to make economic sense, accounting for fees, compliance, and audit risk. Below that, the math usually loses. Above $1 million in qualifying gains over the same period, the savings comfortably clear the cost. Above $5 million, the decree is among the most powerful tax structures available to a US citizen, full stop.

The other half of the analysis is non-financial. Puerto Rico is a real place to live, with real schools, real housing decisions, real distance from family on the mainland, and a real climate (humid, hurricane-exposed, beautiful). The decree is most successful when the move is a fit for the client’s life, not just for the tax return. Discovery calls that end with “I don’t actually want to move to Puerto Rico” save more money than the ones that end with a decree.

FAQ

Talk to the CPA Who Files Both Sides Before You Lock In a Decree

Chapter 2 of Act 60 can be transformative for the right client at the right time, and a long expensive mistake for the wrong client at the wrong time. The federal-side analysis (gain timing, source rules, residency planning, Form 8898 election, audit defense) and the Puerto Rico territorial filings are both what we do. Daniel Hiltzik files both sides, so the whole engagement stays with one firm.

A 30-minute discovery call covers your specific gain or business exit timing, the December 2026 deadline calculus, the realistic federal savings after fees and compliance, and what the next 12 months would look like. Free, no commitment.

Background reading: our Puerto Rico Act 60 strategy hub covers the program at a high level, and the full residency guide walks through the three IRS tests under §937 in depth.