While Puerto Rico is often associated with sandy beaches and warm weather, its appeal to many US citizens extends well beyond the climate. In particular, favorable tax acts have led many US persons to relocate their personal tax residences or businesses to Puerto Rico, often allowing them to avoid paying US tax on that income. Since Puerto Rico is a US territory and not deemed “foreign” for most US tax purposes, this is one of the few ways US citizens may lower their worldwide taxes without having to give up their citizenship or green card. However, both the US and Puerto Rico have caught wind of abuse by US citizens and are proactively taking steps to prevent it.
IRS Crackdown on Act 60
Puerto Rico Act 60, also known as the “Incentives Act” aims to attract individual and business investors to the territory by providing many incentives to resident individuals. Chapter 2 of the Act aims to attract US individuals to relocate to Puerto Rico. To qualify under Chapter 2 the individual must be considered a “Resident Individual” investor. A Resident Individual must meet three conditions:
- Maintain physical presence by being domiciled in Puerto Rico for at least 183 days during the taxable year.
- Consider Puerto Rico to be his or her “regular or principal place of business”
- Meet the closer connection test proving the individual has an aggregate closer connection to Puerto Rico than to the US or any other foreign country.
If a Resident Individual meets these requirements and qualifies for the tax benefits under Chapter 2, the individual is eligible to receive a 100-percent tax exemption from Puerto Rican income taxes on all dividends and interest, and on capital gains stemming from the sale or exchange of securities that appreciated in value after the individual established domicile in Puerto Rico [note law change below].
In 2021, the IRS announced an enforcement campaign targeting these US non-resident citizens claiming tax exemptions through Puerto Rico’s Act 60 who were not meeting the residency and income-sourcing requirements. This enforcement and scrutiny continue to grow. According to the IRS, many taxpayers are taking advantage of a tax benefit intended for those who truly moved their residence to Puerto Rico without actually doing so. On December 12, 2025, the U.S. Government Accountability Office (GAO) issued a detailed report on the topic. In this document the GAO recommends that the “IRS establish procedures to regularly obtain data on all taxpayers claiming Puerto Rico’s resident investor incentive and procedures to review cases of potential noncompliance referred to IRS by Puerto Rico government agencies.” The IRS agreed with all of the recommendations.
Several states, particularly high‑tax jurisdictions like California, New Jersey and New York, are also becoming more aware of the issue. According to the GAO, 381 individuals who claimed the Act 60 resident investor incentive in 2021 had moved from California alone, making it the single largest source of relocations and a likely target for heightened scrutiny from both the IRS and the California Franchise Tax Board.
Individuals relying on Act 60 benefits should be aware of this heightened IRS scrutiny. Anyone who receives any IRS communication that touches on residency, time spent in or outside of Puerto Rico, or travel history, should be cautious of a potential examination. Discrepancies between Puerto Rico and federal filings, including Form 8898, are now easily discoverable, and any Act 60 questionnaires or inquiry letters should be handled immediately. Taxpayers who have concerns about past filings, documentation, or residency substantiation should address them proactively with qualified outside legal counsel before the IRS initiates further action.
Proposed Changes to Act 60
On June 25, 2025, the Puerto Rico Senate passed a bill to extend and revise Act 60. The new bill extends the program’s benefits through December 31, 2055, providing an additional 20 years of benefit. However, the IRS is not the only one taking note of potential issues around Act 60. Included in this legislation are also measures in response to rising housing prices, perceived tax avoidance and the limited economic benefit to locals.
One of the most scrutinized abuses is physical presence. If you are a US citizen living Puerto Rico and taking advantage of Act 60, expect stricter audits and Puerto Rican presence verification. The 183-day rule still applies, however tax authorities may randomly or more frequently request flight records, utility bills, or proof of social and community involvement in Puerto Rico, such as schooling, memberships, etc.
Previously Act 60 required a Resident Individual to purchase residential property in Puerto Rico within the first three years after obtaining the decree. That requirement has now changed to within two years. In addition, under the old rules all Resident Individuals were to comply with an annual contribution of $10,000 to an organized and registered nonprofit organization in Puerto Rico; this annual amount has been increased to $15,000.
In 2026, the new Act 60 compliance portal will require enhanced annual reporting, including certified CPA letters; proof of residency documentation; and a breakdown of income sources and Act 60-eligible activities. Crypto traders must also now declare wallet addresses, transaction histories and asset holdings to ensure capital gains are derived post-residency.
One other change of significant importance is the enactment of a fixed 4-percent tax on capital gains, as well as Puerto Rico sourced interest and dividends. Under the old law this income was completely exempt from Puerto Rican tax, making it highly attractive for US investors. This tax applies only to applicants after January 1, 2026. Resident Individuals with a valid decree before January 1, 2026, are grandfathered in under the old exempt rules.
Staying Compliant in 2026 Forward
To ensure that you continue to receive the benefits under Act 60, you must follow the rules as set forth under the Act. Failure to comply may lead to an automatic revocation of your decree. Keep updated proof of presence (flight logs, leases, bills). Reconfirm your primary residence status. File early and accurately through the new portal. Make charitable contributions before the December deadline.
Most importantly, work closely with both a US and Puerto Rican CPA with Act 60 experience. Windham Brannon’s Tax Practice professionals can provide the right guidance and assist in these matters. For questions or more information, contact your Windham Brannon advisor today, or reach out to Nicole Suk.
