Come Bask in the Caribbean Sunshine & Enjoy The Generous Tax Benefits of Investing in Puerto Rico’s Island-Wide Opportunity Zone
If you’ve realized considerable capital gains from any of your investment successes in the past year, something you may not be aware of is how you can roll those gains tax-free into an Opportunity Zone and defer all of your profits for years and years into the future. If you don’t want to lose a major chunk of those earnings due to capital gains taxes and hungry Uncle Sam looking over your shoulder with his hand out, then here’s some excellent news for you. The Tax Cuts and Jobs Act, December 2017 helped introduce an interesting new concept that helps the investor willing to place capital in lesser developed communities – Opportunity Zones are a noteworthy subject to pay attention to. By making investments in these economically underdeveloped areas, or opportunity zones, from your recently realized capital gains, you can actually defer the taxes on your earnings for several years, or potentially pay no tax at all on those gains if you hold the investment long-term. These economic zones are named “Opportunity Zones” because they have high prospects for growth & development. An investor can capitalize on an opportunity for additional upside by taking advantage of buying a profitable, well-selected asset that comes with built-in tax advantages and allows for years of tax-deferred gains to grow uninhibited by deploying the capital within an OZ.
About Qualified Opportunity Zones
For those who don’t already know about Qualified Opportunity Zones, these are economically-distressed areas that are qualified for these tax breaks. The objective behind their designation is to attract national, foreign, and local investors and contribute to the economic development of these lesser-developed communities.
Puerto Rico, A Major Opportunity for Investors
According to the U.S. Department of the Treasury and directly from the IRS’s website, 98% of zones in Puerto Rico are designated as opportunity zones and eligible for tax redemptions on new developments.
Puerto Rico’s opportunity zone areas encompass nearly every bit of the island, and as such make highly attractive investments that have been gaining a lot of interest from investors, both local investors and capital outside of Puerto Rico. And, because PR is a part of the United States, investors are further saved by all property-related legal regulations on the mainland. US Federal Law applies all throughout Puerto Rico, and the island’s free trade and association with the mainland United States make it a very easy direct travel destination for Americans. Investors can easily travel to visit their investment in Puerto Rico without the need of a Passport, and our consulting operation has a team of local professionals that can help manage assets and property for investors based outside of Puerto Rico who need a competent and reliable local contact.
As Puerto Rico is deemed almost entirely an Opportunity Zone, it opens investors up to a wide selection of opportunities for major tax savings by using PR as part of your overall business & investment strategy. After several years of living here, I can say that much remains to be seen on the horizon for the economic story of the island of Puerto Rico. The opportunity zone designations, and in addition the ACT 60 Tax Incentives, Puerto Rico these days is a hot topic among American investors, digital nomad types, crypto investors, and all sorts of businesses from every industry. Speaking from experience as someone who has lived here, received multiple tax decrees, learned the language, and built a life in PR, it’s amazing to report that we see so many exciting things happening around the island. Puerto Rico has a real energy like things are happening, the culture and the Boricua spirit are alive and strong. These Opportunity Zone deals include the development of new industries, priority projects, and businesses. Apart from generating income, these activities make a huge contribution to the socioeconomic recovery and positive change in the communities of PR which is something we’re personally invested in and always want to promote and move forward as a part of the Puerto Rico expat community.
It was predicted that, in the short run, the OZ program would generate nearly $600 million in new jobs, investments, and advantages to the assets of the central and municipal governments. Activities within an OZ may include inns, hotels, and other businesses directly associated with agriculture, research & manufacturing, development of commercial & residential properties for sale & rent, technological companies, services, and malls.
Crucial Things About Opportunity Zone Legislation
A Qualified Opportunity Fund (QOF) is an investment fund that is formed to make investments in Qualified Opportunity Zones.
Investors get a preferential tax benefit in PR. Any previous unrealized capital gains until no later than 31st December 2026 can be deferred as long as they are reinvested into on of these funds (QOF). As per the proposed regulations of the IRS, all capital gains can qualify for deferral. However, to qualify for the deferral, the investors must invest that capital in a QOF proposed to carry out an eligible activity, in any region authorized by US Treasury Department.
The Qualified Opportunity Fund must have a minimum of 90% of its assets in an OZ. Investors holding QOF investments for a minimum of 10 years may qualify to enhance their base to the original market value of their investment (on the date of selling).
The Puerto Rico Economic Development Opportunity Zones Development Act exempts taxes for Opportunity Zones Funds (OZ Funds) or entities where OZ Fund investment is made (OZ Subs), associated with qualified investments in Puerto Rico’s OZ.
To take the maximum benefits of this act, a Sub OZ or OZ fund must be an exempt business entity, applying for tax breaks to acquire a Tax Exemption Decree.
A OZ decree is a legal agreement that takes place between Puerto Rico’s Government and the OZ Fund or Sub OZ fund. It’s applicable for 15 years.
Incredible Tax Breaks Given to OZ Decree Holders
Investors who hold the OZ decree in Puerto Rico enjoy the following tax exemptions:
- Dividends & Distributions are 100% tax exempted.
- Municipal License (net income generated through eligible business activity) is 25% tax exempted.
- Personal Real Estate are 25% tax exempted.
- Municipal Construction taxes related to the eligible activity are 25% tax exempted.
It should be noted that the municipalities can hike the tax exemption percentage given above from 25% to 75% through municipal ordinances.
Real Estate Investment in Puerto Rico is a Promising Investment Opportunity
Fiscal mismanagement and debt crises along with natural disasters that happened recently have changed PR’s Real Estate market conditions completely. As of now, real estate acquisition in Puerto Rico is quite expensive compared to post-Maria prices in 2017, but still plenty of exciting opportunities remain for investors.
Considering how easy it is for natives of the United States to travel to PR, it has become a prime tourist location for US travelers as well. Additionally, there is no currency risk because transactions and business is all done in US dollars. It’s even more interesting to know that you can buy a property in Puerto Rico with similar characteristics to a US property at a substantially lower price. So, whether you’re looking for an upscale luxury property near the beachfront or a standard single family house in a residential area, Puerto Rico has opportunities around every corner for the investor willing to find the deals.
With a low real estate acquisition cost and a booming AirBnb rental industry, total ROI on Puerto Rican real estate can reach 15%-20% for short term rentals, and between 10-15% for long-term rentals. Between the Opportunity Zone advantages, and the ACT 60 Incentives program, there’s no reason why any American entrepreneur or investor shouldn’t be able to legally reduce their tax bill to near 0% a year. I would say 2-5% max. That’s a very realistic and doable goal that we achieve for clients day in and day out through relocating their tax residency and taking advantage of Puerto Rico’s ACT 60 program.
The purpose of the “Opportunity Zones Program” is for Puerto Rico’s holistic development. It promotes the development of various communities as well as different economic sectors on the island. The goal is for Puerto Rico to build a robust economy where the people of the island flourish, both locals and foreigners. The OZ deals are one of many avenues to attract investment and generate activity in the local property market and into local businesses!
The combination of reasonable prices on PR Real Estate relative to high-tax places like NYC, California, etc. plus the Opportunity Zone and ACT 60 programs, all of these are strong drivers of demand and Puerto Rico is becoming known as a sort of paradise for investors looking for a beautiful low-tax place to manage their capital or run their business.
To Your Success,