At a glance
- What changes. A bona fide Puerto Rico resident is not taxed by the United States on Puerto Rico source income. With an Act 60 decree, Puerto Rico’s own rate on qualifying investment income is 0 percent.
- What does not change. US source income stays fully taxable by the United States, and so does appreciation that built up before the move.
- The test is residency, not an address. 183 days on the island, a tax home there, and a closer connection to Puerto Rico than to anywhere else.
- The decree is separate from residency. Residency alone gives the federal exclusion; the decree is what makes Puerto Rico’s own rate 0 percent.
Puerto Rico taxes are not lower than US taxes in the way most comparisons suggest. The island has its own income tax, and its ordinary rates are not low. What makes the arrangement work is a narrower thing: the United States does not tax a bona fide resident of Puerto Rico on Puerto Rico source income, and an Act 60 decree can take Puerto Rico’s own tax on qualifying investment income to zero. The two have to line up.
The exclusion is in section 933. It applies to income from sources within Puerto Rico, and only to someone who is a bona fide resident. Everything below follows from what that sentence does and does not cover.
What this looks like on an actual return
If you read nothing else, read this. One $2,000,000 long-term gain, two residencies.
A married couple filing jointly sell an asset at a $2,000,000 long-term gain. In the first column they are residents of a mainland state. In the second they are bona fide residents of Puerto Rico with an Act 60 individual resident investor decree, and the entire gain accrued after the move.
| On the return | Mainland resident | Bona fide PR resident, with a decree |
|---|---|---|
| Long-term capital gain | $2,000,000 | $2,000,000 |
| Federal capital gain tax, at 20 percent | $400,000 | — |
| Net investment income tax, at 3.8 percent | $76,000 | — |
| Puerto Rico tax on the gain | — | $0 |
| Total tax on the gain | $476,000 | $0 |
$476,000, before any state tax. That is the number every article about this quotes, and it is real. It is also the best case, and it holds only when every condition in the next two sections is met. Figures are illustrative and rounded; the 20 percent rate applies because a gain of this size carries the couple past the 2026 threshold of $613,700 of taxable income, per Rev. Proc. 2025-32.
The one-line version. The move exempts Puerto Rico source income earned after you get there. It does nothing for US source income, and nothing for gain that had already accrued when you arrived.
What moves, and what does not
This is the table that decides whether a move is worth anything in a particular case. Residency changes the treatment of some income and none of the rest.
| The income | Mainland resident | Bona fide PR resident, with a decree |
|---|---|---|
| Capital gain on assets bought after the move | Up to 23.8 percent federal, plus state | 0 percent |
| Gain that accrued before the move | Up to 23.8 percent federal | Still taxed by the United States on the pre-move portion |
| Interest and dividends from Puerto Rico sources | Federal, plus state | 0 percent |
| Dividends from a mainland corporation | Federal, plus state | Still US taxable. The source does not move with you |
| Wages for work physically performed in Puerto Rico | Federal, plus state | Excluded from US tax under section 933; Puerto Rico taxes it |
| Wages for work performed on the mainland | Federal, plus state | Still US taxable |
| Services exported from Puerto Rico by a decree business | Federal corporate or pass-through rates | 4 percent Puerto Rico corporate rate under Chapter 3 |
| Rental income from a mainland property | Federal, plus state | Still US taxable |
The pattern is that source controls, and source does not follow the taxpayer. Moving to San Juan does not make a dividend from a Delaware corporation Puerto Rico source income. This is where most of the disappointment in practice comes from: someone moves, keeps a mainland portfolio and a mainland business, and finds that very little of what they earn has changed character.
The residency test is the whole thing
Bona fide residence is defined in section 937, and all three tests have to be met in the same year.
| Test | What it requires |
|---|---|
| Presence | At least 183 days in Puerto Rico during the tax year, with alternatives in the regulations, set out in Publication 570, for people who cannot meet the day count in a particular year |
| Tax home | No tax home outside Puerto Rico during the year. Your regular place of business is on the island |
| Closer connection | No closer connection to the United States or a foreign country than to Puerto Rico, judged on where your home, family, belongings and social ties are |
The day count is the one people track and the other two are where cases are lost. Keeping a house, a car, a doctor and a golf club on the mainland is evidence about connection, and it is the kind of evidence that is examined after the fact rather than agreed in advance.
Where people get this wrong
Treating the decree and the residency as one thing. They are separate. Residency under section 937 is what gives the federal exclusion. The Act 60 decree is a contract with Puerto Rico that fixes its own rate. You can have residency without a decree, and a decree is worth nothing without residency.
Assuming the 0 percent covers everything. It covers Puerto Rico source income of the kinds the decree names. A portfolio that stays with a mainland broker, invested in mainland companies, mostly does not qualify.
Forgetting the pre-move gain. Appreciation that built up while you were a mainland resident stays within the reach of the United States. Selling the day after you land does not convert it. The Chapter 2 guide sets out how that split is worked out.
Ignoring the exit from the state. A state does not stop taxing you because Puerto Rico has started. Several states are aggressive about residency, and leaving one properly is its own piece of work with its own evidence.
What to do about it
Start from what you actually earn. The move is worth a great deal to someone whose income is investment gains they can realize after arriving, or services they can perform from the island. It is worth very little to someone whose income is a mainland salary or a mainland operating business that stays where it is.
Model the pre-move gain before you sell anything. For a holding with a long history, the portion the United States keeps can be most of the gain. That number decides whether the timing of a sale matters more than the move.
Treat the day count as a record, not a memory. Presence is proved with contemporaneous records. Building them from a calendar two years later is the hard way.
Get the state exit and the arrival in the same plan. They are two separate proofs about the same year, and they have to tell one consistent story.
Frequently asked questions
Do I stop paying US tax if I move to Puerto Rico?
Only on Puerto Rico source income, and only once you are a bona fide resident under section 937. US source income stays fully taxable by the United States. A US citizen living in Puerto Rico still files a federal return; what changes is what goes on it.
Are Puerto Rico income tax rates lower than US rates?
Not as a general matter. Puerto Rico’s ordinary income tax rates are not low, and someone who moves without a decree can pay more overall rather than less. The benefit comes from the combination of the section 933 exclusion and an Act 60 decree that fixes Puerto Rico’s own rate on qualifying income, not from the ordinary rate table.
How many days do I have to spend in Puerto Rico?
At least 183 days in the tax year under the presence test, with alternative ways to satisfy it in the regulations. The day count is necessary but not sufficient: the tax home and closer connection tests have to be met in the same year, and those are the ones that are harder to evidence.
Does the 0 percent rate apply to gains on stock I already own?
Not to the part that accrued before you became a resident. That portion remains taxable by the United States. Only the appreciation after the move falls within the decree, which is why the value of a move depends heavily on what is already in the portfolio and how long it has been there.
Related reading
- Puerto Rico Act 60, in full. What the decrees are and how they fit together.
- Chapter 2, for individual investors. The decree behind the 0 percent rate, and the pre-move gain split.
- The three bona fide residency tests. What each one actually requires.
- Capital gains after a move to Puerto Rico.
- The Puerto Rico tax benefits, set out plainly. What each decree does and what it does not.
The firm is authorized to file Puerto Rico tax returns and works with people making this move on both sides of it. We handle the federal position and the Puerto Rico filing. Act 60 services sets out what that covers.
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A short conversation about your situation, our read on it, and whether it is a mutual fit.
General information, not advice for a particular situation. Figures are illustrative and reflect federal law for tax year 2026. Primary sources: Internal Revenue Code sections 933, 937 and 1411; Rev. Proc. 2025-32 section 4.03; and Puerto Rico Act 60. Puerto Rico tax treatment depends on the terms of a decree, which are specific to the holder. State tax is not addressed.
