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Is Puerto Rico America’s Best Investing Destination? Here’s What You Need to Know

The year-round sunshine, the convenience of direct flights, the incredible food and culture—there’s a lot to love about Puerto Rico. As an American citizen, all the same rules apply for buying investment property in this balmy, seaside U.S. territory as they do on the mainland. 

The Market Details

According to short-term rental tracking company AirDNA, it should come as no surprise that Puerto Rico is a booming and profitable short-term rental market. The capital city of San Juan gets AirDNA’s top score of 100, with average occupancy rates of over 60%, average nightly rates of over $200, and average annual revenue of over $45,000 (up almost 10% YOY). 

Like all Caribbean islands, Puerto Rico has a hurricane season that runs from June 1 to Nov 30, so bookings can be a little softer during August and September, dipping below 50% occupancy rates for these months. That said, during winter months, average nightly rates hover around $325, and occupancy rates bounce up closer to 70%. Investment properties here run the gamut just like any other beach location—huge, multimillion-dollar single-family homes, sweet beach cottages, and condos with wide ocean views.

Snowbirding Has Big Benefits

But there are even more reasons to love investing in Puerto Rico if you’re willing to make some bigger changes. What if you moved there? At least for part of the year? Rather than snowbirding in the usual locations of Scottsdale, Naples, or Tampa, if you elect to spend winters in Puerto Rico, you will be much, much richer for it.  

This is thanks to Act 60, which creates huge financial incentives for mainlanders to move to the island. If you become an island resident, under Act 60, otherwise known as the Individual Investors Act, you benefit from:

  • 100% tax exemption from Puerto Rico income taxes on all dividends
  • 100% tax exemption from Puerto Rico income taxes on all interest
  • 100% tax exemption from Puerto Rico income taxes on all short-term and long-term capital gains
  • 100% tax exemption from Puerto Rico income taxes on all cryptocurrencies and other crypto assets

This means a break on both local and federal taxes, since the U.S. federal government does not directly tax Puerto Rico residents, leaving that up to the local government of Puerto Rico.

To qualify for these amazing incentives and pay zero capital gains on all your investments, whether that’s real estate or stock investments, you do, however, need to actually move to the island for part of the year and purchase a home within two years of arrival. 

There are three tests the IRS requires you to pass to prove this:

  1. Presence test: There are many ways to do this, but you basically need to show that you are physically present in Puerto Rico for 183 days (six months) during the year. During 30 of those days, you can be traveling in other countries (just not the U.S.), so it’s actually 153 days (five months), and there are medical and weather exceptions to this also.
  2. Tax home test: Your primary or regular place of employment needs to be in Puerto Rico. If you don’t have a regular place of employment (i.e. if you’re a passive investor or retired), this defaults automatically to where you live.
  3. Closer connection test: This is slightly squishy but includes things like where your permanent home is, where your cars and clothing are, where your bank is, etc.

The Fine Print

  • Currently, Act 60 sunsets at the end of the year in 2035, after which time you’ll owe taxes on any passive income. 
  • You have to apply and pay the fees, which are around $6,000.
  • You must make a $10,000 charitable contribution.

Final Thoughts

Ready to buy your plane ticket yet? Puerto Rico is win-win, a great vacation market for short-term rentals with high occupancy and nightly rates, but for the right investor, the real home run involves a moving van (or boat?). Incredible financial incentives await investors willing to call this island home.

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

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