Expat Tax Residency in Puerto Rico

What makes Puerto Rico a distinct tax jurisdiction for US citizens?

Puerto Rico occupies a unique position in US tax law: it is a US commonwealth whose residents are US citizens, yet Puerto Rico has its own internal revenue code administered by the Departamento de Hacienda. For US federal tax purposes, IRC Section 933 allows a qualifying bona fide resident of Puerto Rico to exclude Puerto Rico-source income from gross income on their US federal return -- a benefit unavailable anywhere else in the US tax system. US-source income (wages earned on the mainland, dividends from Delaware corporations, mainland bank interest) remains fully subject to US federal income tax regardless of PR residency. The operative question is whether a taxpayer qualifies as a bona fide resident of Puerto Rico under IRC Section 937 and Treasury Regulation 1.937-1. All three tests below must be satisfied for the full taxable year.

What is the presence test under IRC Section 937 and how can it be satisfied?

The presence test under Treasury Regulation 1.937-1(c) does not require exactly 183 days -- it offers five alternative routes, any one of which is sufficient:

1. Basic 183-day rule. Physically present in Puerto Rico for at least 183 days during the taxable year. This is the most commonly used test.
2. Three-year rolling average. Present in Puerto Rico for at least 549 days during a consecutive three-year period (the current year plus the two immediately preceding years), with at least 60 days of presence in each year of that period.
3. Limited US days. Present in the United States for no more than 90 days during the taxable year.
4. Minimal US earned income. Earned income from US sources does not exceed USD 3,000 for the year, and the taxpayer spends more days in Puerto Rico than in the United States.
5. No significant US connection. The taxpayer had no significant connection to the United States during the year. A permanent home in the United States, current voter registration in any US political subdivision, or a spouse or dependent child whose principal place of abode is in the United States each constitute a significant connection (subject to limited exceptions for custody arrangements and student status).

Constructive presence rules under Reg. 1.937-1 allow certain days spent away from Puerto Rico to be counted as PR days -- for example, days spent outside Puerto Rico to accompany a family member receiving qualifying medical treatment, and days outside during a federally declared major disaster affecting the taxpayer's Puerto Rico home.

What is the tax-home test and where must your principal place of business be?

Under Treasury Regulation 1.937-1(d), the tax-home test requires that the taxpayer did not have a tax home outside Puerto Rico at any point during the taxable year. Tax home is defined by reference to IRC Section 911(d)(3): it is the taxpayer's regular or principal place of business. If the taxpayer is not engaged in carrying on a trade or business (or has no regular place of business by the nature of their work), tax home is the taxpayer's regular place of abode in a real and substantial sense.

A taxpayer who maintains an office or principal business location on the US mainland fails this test even if they otherwise spend 183+ days in Puerto Rico. Employees who commute to a mainland job cannot establish a Puerto Rico tax home, because the tax home follows the work, not the residence.

What is the closer-connection test and what factors does the IRS examine?

Even a taxpayer who passes the presence and tax-home tests must not have a closer connection to the United States (or to a foreign country) than to Puerto Rico. Treasury Regulation 1.937-1(e) applies the principles of IRC Section 7701(b)(3)(B)(ii), examining a range of objective facts:

• Location of the taxpayer's permanent home
• Location of the family (spouse, children, dependents)
• Location of personal belongings, vehicle, and furniture
• Jurisdiction where the taxpayer votes and holds a driver's license
• Location of bank accounts and business relationships
• Location of civic, cultural, and religious memberships
• Jurisdiction the taxpayer considers home for tax-filing and other official purposes

Renting out a former US home to an unrelated party generally does not create a permanent home in the United States -- but using any part of that property for personal purposes under IRC Section 280A(d) principles converts it back into a permanent home and can break the closer-connection test.

What special rules apply in the year you move to or from Puerto Rico?

The year of move presents specific complexity because the taxpayer is not a PR resident for the entire year. Treasury Regulation 1.937-1(f) provides relief in two directions:

Moving to Puerto Rico. A taxpayer can satisfy the tax-home and closer-connection tests for the year of arrival if: (a) they were not a bona fide resident of Puerto Rico in any of the three immediately preceding tax years; (b) during the last 183 days of the move year, they had no tax home outside Puerto Rico and no closer connection to the United States or a foreign country; and (c) they maintain bona fide resident status for each of the three tax years immediately following the move year. The presence test is evaluated independently and still requires satisfying one of the five alternatives for the full year.

Moving away from Puerto Rico. The general departure rule mirrors this: a taxpayer satisfies the tax-home and closer-connection tests for the departure year if they were a bona fide resident for each of the three preceding years and, during the first 183 days of the departure year, had no tax home outside Puerto Rico and no closer connection to the United States. A special Puerto Rico exit rule allows US citizens with at least two full preceding years of bona fide PR residency to be treated as a bona fide resident through the date their tax home actually shifts out of Puerto Rico, so long as they maintain a closer connection to Puerto Rico for the pre-departure portion of the year.

For IRC Section 933 purposes, the entire-taxable-year requirement means a taxpayer who arrives or departs mid-year generally cannot exclude PR-source income for that year from their US federal return -- except in the departure case where the taxpayer was a bona fide resident for at least two continuous prior years, in which case PR-source income attributable to the pre-departure portion of the year may still be excluded.

How does Act 60 of 2019 work for individual resident investors, and is the 0% rate still available?

Act 60 of 2019 (the Puerto Rico Incentives Code, Chapter 2) offers Individual Resident Investors who qualify as bona fide PR residents a Puerto Rico income tax exemption on three categories of qualifying PR-source income: (a) post-residency capital gains on investments made and accrued after establishing PR residency; (b) dividends from PR sources; and (c) interest from PR sources. Pre-residency built-in gains remain subject to US federal capital gains tax regardless of residency, and if recognized ten or more years after establishing residency, are taxed by Puerto Rico at 5% (not 0%).

For applicants who submitted their decree application on or before December 31, 2026, the 0% Puerto Rico rate on qualifying income applies through December 31, 2035. Act 38-2026 extended program eligibility through December 31, 2055, but applicants submitting on or after January 1, 2027 face a new 4% preferential rate (not 0%) on interest, dividends, and post-residency capital gains. Post-2026 applicants must also satisfy a new six-year PR non-residency lookback from the date of relocation.

Obtaining Act 60 benefits requires: securing an individual decree from the Departamento de Desarrollo Economico y Comercio (DDEC); purchasing a Puerto Rico property as a principal residence within two years of decree issuance; making an annual charitable contribution of at least USD 10,000 (USD 5,000 to organizations addressing child poverty, USD 5,000 to other qualifying nonprofits); filing an annual compliance report with a USD 5,000 fee; and maintaining genuine bona fide PR residency each year the decree is in force. The IRS actively scrutinizes Act 60 claims and has issued Chief Counsel Memorandum 2025-38-025 addressing income sourcing and residency verification.

How does IRC Section 933 exclude Puerto Rico-source income from US federal tax?

IRC Section 933(1) provides that a US citizen who is a bona fide resident of Puerto Rico during the entire taxable year may exclude income derived from sources within Puerto Rico from gross income on their US federal return. Federal employee compensation is explicitly excluded from this benefit -- wages paid by the United States government or any federal agency remain fully taxable on the federal return regardless of PR residency.

Section 933 shifts the tax burden to Puerto Rico's own internal revenue system; it does not eliminate the tax. Puerto Rico taxes PR-source income under its own code. The exclusion also carries a disallowance consequence: no deduction, credit, or exemption properly allocable to the excluded PR-source income may be claimed on the federal return. Self-employment tax (Social Security and Medicare, currently 15.3% on net SE income up to the Social Security wage base, plus 2.9% Medicare thereafter) is not sheltered by Section 933 -- bona fide PR residents still owe SE tax on PR-source self-employment income to the United States.

Filers claiming the Section 933 exclusion must modify their standard deduction calculation on Form 1040 and write an explanatory statement on the return. Non-PR-source income (US-source and foreign-source income that is neither US nor PR) is unaffected by Section 933 and remains fully taxable on the federal return.

What is Form 8898 and when must it be filed?

Form 8898 (Statement for Individuals Who Begin or End Bona Fide Residence in a U.S. Possession) must be filed with the IRS for any tax year in which a taxpayer becomes or ceases to be a bona fide resident of Puerto Rico, provided their worldwide gross income for that year exceeds USD 75,000. Worldwide gross income for this threshold includes all income in money, goods, property, and services from all sources. The form is filed with the taxpayer's annual Form 1040 for the year in question. Failure to file when required carries a flat USD 1,000 penalty; a reasonable-cause exception is available but must be established affirmatively.

Filers considering Puerto Rico residency should review Puerto Rico country overview for additional jurisdiction context and statutory links. The rules described here involve source-of-income determinations, multi-year compliance tracking, and interaction between two separate tax systems. Work with a qualified tax professional experienced in US territory taxation before acting on any of this information.