A Guide for Compliant Eligibility
If you’re exploring Puerto Rico’s Act 60 incentives, or planning to move to Puerto Rico, navigating bona fide residency requirements is mission-critical. This guide lays out everything you need to know: the federal “three-test” standard, Act 60-specific administrative obligations, documentation strategies, audit risk insights, and a compliance checklist.
Why Bona Fide Residency Matters
Puerto Rico’s Act 60 offers incredible tax incentives for individual investors and business owners, including favorable treatment of capital gains and other income. But to access these benefits, you must become a bona fide resident of Puerto Rico under U.S. federal law. That means passing three legal tests: presence, tax home, and closer-connection. Coupled with Act 60’s own requirements—like property purchases and charitable contributions—it’s a legal and administrative framework, not a simple checklist. The IRS takes these claims seriously; proper planning and documentation are essential.
1. Federal Tests to Meet Bona Fide Residency
To claim bona fide residency, you need to satisfy all three tests:
A. Presence Test
You must meet the Presence test under one of five paths defined in Treasury Regulation §1.937-1(c):
- Being physically present in Puerto Rico for 183 days or more in the taxable year;
- Being present in PR for 549 days over the current tax year plus two preceding years, with at least 60 days each year;
- Being in the United States 90 days or fewer in the taxable year;
- Having $3,000 or less of U.S.-source earned income and more days in Puerto Rico than the U.S.;
- Having no significant connection to the U.S. (a rare alternative).
This test is bright-line, heavily scrutinized in audits, and requires precise day-count tracking.
B. Tax-Home Test
Your tax home should be Puerto Rico. If you operate a business or have your professional and economic center of activities here, and don’t maintain a tax home in the U.S., you pass the test. If you work remotely for U.S. clients but manage business operations, meetings, and billing in Puerto Rico, this helps satisfy the requirement.
C. Closer-Connection Test
This is a facts-and-circumstances assessment: You must demonstrate stronger ties to Puerto Rico than to the U.S., through your home, immediate family, banking activities, memberships, driver’s license, voting, social networks, and more. It’s a qualitative test that can make or break your bona fide residency claim.
2. Act 60-Specific Requirements for Individual Resident Investors
Beyond federal tests, Act 60 requires several formalities to maintain the tax incentive decree:
- Annual charitable donation — $10,000 per year donation to qualifying Puerto Rico nonprofits.
- Primary residence purchase — you must buy a PR residence from an unrelated seller within two years of receiving the decree, and use it as your main home.
- Annual reporting and fee — file the decree’s required annual report and pay applicable government fees.
- Eligibility windows — there are restrictions on prior Puerto Rico residency and deadlines to secure benefits. The decree itself is a contract and its obligations must be honored.
Strong recommendation:
- Puerto Rico bank account — open and use a PR bank account to demonstrate financial ties. *While this item is not a requirement, it is highly recommended.
3. Navigating Part-Year Rules and Transition Years
Moving mid-year introduces complexity. IRS rules allow part-year bona fide residency, but only under precise conditions around entry, exit, and test satisfaction. Errors in timeline modeling can completely void eligibility, so careful date planning and tax modeling are vital in the transition year.
4. Documentation: Your Compliance Backbone
Solid documentation is your strongest defense if audited. You should collect and preserve:
- Daily travel logs — detailed calendar showing days in/out of PR, along with flight details or boarding passes.
- Passport stamps/immigration records — plus itineraries for backup.
- Residence documentation — lease or deed, utility bills, mortgage statements showing PR primary home acquisition.
- Puerto Rico driver’s license / voter registration / vehicle registration — proof of intent to integrate.
- Local bank statements — show consistent PR financial activity.
- Business documentation — invoices, contracts, payroll or agreements that show your PR business base.
- Family and social ties — school records, spouse activity, community or club memberships.
- Puerto Rico and U.S. tax filings — display how you report income and claim exclusions.
- Decree file — copies of the decree, annual report, donation receipts, property purchase documentation.
5. Avoiding Audit Red Flags
The IRS is targeting residency claims more aggressively. Common triggers include:
- Lack of real substance in Puerto Rico — minimal home or operations, business still in the U.S.
- U.S.-based family or ties — minor kids living in the U.S., spouse not relocating.
- High U.S. economic dependence — excessive U.S.-source income or continuing U.S. client management.
- Poor recordkeeping — missing or inconsistent day counts and travel records.
- Unmet decree obligations — no property purchase or charity contribution tracked properly.
Focus on demonstrating substance, maintaining documentation, and honoring all decree obligations—with an eye toward long-term compliance.
6. Filing Requirements and Technical Pitfalls
Form 8898: If you start or cease bona fide residency, you may need to notify the IRS—missing this can create separate compliance headaches.
U.S. tax filing obligations: Bona fide residents often don’t pay U.S. federal tax on Puerto Rico-source income, but U.S.-source income or other filing triggers still require U.S. returns.
Capital gains timing: Gains on assets acquired after becoming a bona fide PR resident may enjoy Act 60 benefits—but gains accrued pre-move may not. Plan timing carefully.
7. A CPA-Legal Compliance Checklist Before Moving
- Partner with experienced professionals: Engage a CPA with expertise in Puerto Rico to coordinate federal and local compliance.
- Model day-count scenarios: Identify if you’ll hit 183 days or need the 549-day or other test.
- Establish PR tax home: Move business activity, client records, and billing into Puerto Rico.
- Set up your PR bank account: Move significant activity in and out of the account for traceability.
- Plan your main home purchase: Purchase within the two-year deadline and document financing.
- Schedule and document donations: Ensure proper amounts and receipts as required.
- Set up recordkeeping systems: Track days, travel, social ties, receipts, logs, etc.
- File all applicable IRS forms: Especially Form 8898 if moving mid-year.
- Draft your Act 60 decree: Work with Act 60 experts to file the application and prevent any missteps.
- Review annually: Re-validate your residency, documentation, and obligations each year.
Summary Table: Requirements at a Glance
| Requirement Category | What to Meet |
| Federal Presence Test | 183 days in PR (or alternative rules) |
| Tax-Home Test | Primary place of business/ abode in Puerto Rico |
| Closer-Connection Test | Stronger ties to PR (home, banking, community) |
| PR Bank Account | Open and demonstrate financial activity on island |
| Charitable Donation | $10K/year to local nonprofits as outline in decree |
| Home Purchase | Residential property in PR used as main residence |
| Annual Reporting | Act 60 report + fee submitted on time |
| Form 8898 (if applicable) | File when claiming/ceasing bona fide residency |
| Tax Filings | File PR returns properly and U.S. if required |
| Documentation | Travel logs, receipts, logs, social and legal ties |
Final Thoughts: A Legal-First Approach You Can Trust
Bona fide residency is not a convenience, it’s a legal status with meaningful tax consequences. To benefit from Puerto Rico’s Act 60, align both federal residency rules and Act 60’s decree requirements with intentional planning, perfect documentation, and ongoing compliance. A misstep can mean loss of benefits or IRS challenge. Thoughtful legal and CPA support ensures your residency stands up to scrutiny and delivers the intended tax advantages.
Need help turning this into reality?
Contact our expert Puerto Rico CPA & tax advisory team — we specialize in Act 60 compliance and residency guidance, and we’re ready to help you move forward with confidence.