Puerto Rico

26 Replies

I just learned that if you start up a company in Puerto Rico and flip a house in California and hypothetically profit 100k on the flip, that since you're incorporated in PR that the USA can't tax that profit. And PR has wicked low tax rates. Is this true?

There are structures that can make this possible, but it is VERY easy to do it wrong. As Victor said, most states will go after you for state income tax for any activity you do in the states. The PR law is focused on export services. This means your PR business must provide services to your CA business.  There are many subtleties to setting this up correctly. I just went thought it last year and I am filing my first return under the PR tax structure.  I am happy to connect you with the professionals I used to set things up. Just let me know if you are interested. 

Wow, this is an interesting topic, I don't think it will fly, but since structuring is @Kira Golden  's specialty, I would now be interested. As far as I am concerned and what I know, if you do business in CA, you pay CA taxes first on your flip and whatever is left, you can pack and go wherever you want.

@Manolo D.  the way you structure your entities and what services are conducted are critical to how things get interpreted. I am not a lawyer myself so I have to be very careful not to give legal advise.  Something as broad as "if you business in CA you pay CA taxes first" is not always the case. There are rules around where the business is based, what services are provided, and if there are bricks and motor in the state. CA and NY are among the most aggressive in claiming tax liability. For some background on the law start here.

 

@Kira Golden  ah, i see what you mean, thanks for the link, the few paragraphs is saying you need to be a resident there, so I am not sure if that applies to me. anyway, if i have time, i am sure there are work arounds in the article and would do further reading. thank you for the link and bookmarked it for future reading. :)

There are two structures. One where you are a resident and pay 0% tax on dividends, capital gains and interest income, and another way your business is located there at pays 4%. I have a gray legal team that can structure all this for people. I don't do that part myself. If anyone wants an introduction just let me know and Ill connect you with them. 

Hello.

I am looking at buying a multiplex to live in and rent out.  I'm seeing a lot of reasonable prices in the Rincon area and I'm ready to make the leap within the year.  Kira, I see that you have a portfolio started down there. Would you perhaps have any warnings or advice for me? 

Thanks,

Derek

yes you could drop your taxes on your short term profits from a flip (that should be taxed as ordinary gain which is over 35% especially when you add state tax and obama's care) 

The challenge would be if you do drop your tax (usually to around 20% or less on these real estate flips) your net money will be sitting in the Puerto Rico company you set up. 

I know a few fund managers from NY that do that and save 30% plus on tax from each deal. The firm that set them up is in Washington DC and they even have an irs ruling letter to support what they do. 

It is very complicated though and if you profits are less than $200k per deal it may not make too much sense for you 

Hi Chandan, 

i saw that no one chimed in on your question.. The answer is yes.. I'm a lender here in Puerto Rico, and I primarily work w/ people from the states looking to finance RE properties here (1-4 units residential) prices are historically low, and  depending on the location you for sure can experience cash flow quickly on your investments. 

I am looking at investing in Puerto Rico. I've been told that places on the west coast like Aguada, Aguadilla, Isabella, Rincon could be good. Real estate prices are so low there right now compared to mainland US. I would not live there full-time or even half time so that tax benefit is lessened. I'm wondering if anyone has invested there from afar and can comment on the benefits and pitfalls of doing this considering the economic woes of the area?

Hi Scott,

We've been traveling to Rincon annually for the last 5 years. I considered investing too because I like to visit there. What turned me off is that almost every cow pasture is for sale in rincon, even the one in front of Tres Palmes, the marine reserve. I've also heard a lot of the public beaches are going private so beach access could be impacted in certain areas. In Aguadilla at "wilderness", a world class surf break, a resort that was being fought for 10 years may break ground now. I would travel there at least 10x before I'd write a check. Try and get as much input as you can from people that live there and undestand that politics down there can be shady. 

Thanks very much @Mark Rider for the careful advice.  I've been to Rincon/Aguada twice now and will be speaking with the guy whose hostel I stayed at down there this week.  I'm hoping the rewards may outweigh the risk.

If anyone else has input on this as well I would love know your thoughts...

I don't know why you couldn't do a 1031 exchange and then sell the PR property and pay much less taxes.  The trick would be finding a quick sale opportunity in PR like Candado.

Account Closed Unfortunately, you can't sell a property in the states and buy a replacement property in Puerto Rico. Puerto Rico properties don't qualify for Exchange treatment. Property located in U.S. Virgin Islands, Guam and the Northern Mariana Islands are considered like-kind to U.S. property.

@Lauren Speidel

You are correct Lauren you cannot do a 1031 exchange but you can do the following:

1) opportunity zone deferral

Or

2) pay just 15% tax on your net gain and take the rest of the money to invest it in Puerto Rico it anywhere else

There are many ways to avoid or defer capital gain taxes but people know only 1031 exchanges rules because that’s what brokers promote to double dip on commissions

Originally posted by @Luis Saez :

I just learned that if you start up a company in Puerto Rico and flip a house in California and hypothetically profit 100k on the flip, that since you're incorporated in PR that the USA can't tax that profit. And PR has wicked low tax rates. Is this true?

Fascinating Discussing So Far,

@Luis Saez You may have heard about ACT 20-22 which provides eligible businesses and investors special tax exemptions in Puerto Rico. You can learn more about it here: https://www.the2022actsociety.org . The tax incentives are set up for bona-fide residents of Puerto Rico / Puerto Rican based companies.

My wife and I are moving to the island. We love it down there and look forward to living there and investing as well. We would be grateful to connect with other professionals on the island.

I reside in PR.  I run my tax law and accounting practice under Act 20/22.  Love it here.

Originally posted by @Brandon Leffler :

@John Hyre

Hello John

I live in Stockton, California and I own 3 properties. I would like to do a tax transfer into a property in Puerto Rico. Is this allowed?

If you talking about 1031, no you can’t  

Originally posted by @Kira Golden :

@Manolo D.  the way you structure your entities and what services are conducted are critical to how things get interpreted. I am not a lawyer myself so I have to be very careful not to give legal advise.  Something as broad as "if you business in CA you pay CA taxes first" is not always the case. There are rules around where the business is based, what services are provided, and if there are bricks and motor in the state. CA and NY are among the most aggressive in claiming tax liability. For some background on the law start here.

Hey Kira,

I'm looking for some legal advice on creating an LLC. The Puerto Rico LLC idea seems interesting, but how would you structure it?

Originally posted by @Conan Fox :
Originally posted by @Kira Golden:

@Manolo D.  the way you structure your entities and what services are conducted are critical to how things get interpreted. I am not a lawyer myself so I have to be very careful not to give legal advise.  Something as broad as "if you business in CA you pay CA taxes first" is not always the case. There are rules around where the business is based, what services are provided, and if there are bricks and motor in the state. CA and NY are among the most aggressive in claiming tax liability. For some background on the law start here.

Hey Kira,

I'm looking for some legal advice on creating an LLC. The Puerto Rico LLC idea seems interesting, but how would you structure it?

It depends on what you want to do. Talk to a lawyer down there, because there are many obscure laws that can cause issues in the long run if you do it wrong. Their legal system and government help is a spiderweb to navigate.