Timing plays an important role on the financial impacts of Act 22. Characteristics such as initial acquisition, date of residency and the date of sale all affect returns. The income characteristics are also important. Below are a few examples that illustrate Act 22 in action.
Example 1: In 2000, 100 ounces of gold were acquired at $300/oz. In 2016, Puerto Rican residency is established and gold is trading at $1,300/oz. In the year of sale, gold has appreciated to $2,000/oz. This is where the tenure as a Puerto Rican resident comes into play. If the sale is within the first ten years of residency, the US government will look to collect “Built In Gains” tax on the previously unrealized $1,000 unrealized gain ($1,300-300) at US long term capital gains rates and the other $700 will be subject to 0% under Act 22. If the sale is after the tenth year of residency, this $1,000 portion of the gain would only be subject to a 5% tax from Puerto Rico and the $700 will be taxed at 0%.
Example 2: On the day you move to Puerto Rico, you buy Apple stock for $100/share. Five years later, you sell Apple at $200 per share, you owe nothing to PR or the US government. Dividends from PR based companies are tax-exempt but dividends from US marketable securities would be US taxable income. This is a key distinction between capital gains and dividend income as dividends are taxed where they are earned. Investments in US securities by a PR fund yields a 100% tax exempt event.