Residency Planning Checklist
The following steps address the three prongs of the federal bona fide residency test under IRC §937(a) and the closer connection factors under Treas. Reg. §301.7701(b)-2(d). Each step should be completed and documented as part of the relocation process.
Home and Physical Presence
| Action | Purpose | Test Addressed |
|---|---|---|
| Establish primary residence in Puerto Rico | Required for presence, closer connection, and property purchase requirement (Ch. 2) | All three tests |
| Sell, rent out, or vacate mainland U.S. home | Eliminates “permanent home” as a significant connection and closer connection factor | Presence (Alt. 5), Closer Connection |
| Track days of presence in PR, U.S., and foreign countries | Contemporaneous day-count log is essential evidence for presence test | Presence Test |
| Maintain travel records (boarding passes, hotel receipts, passport stamps) | Corroborates day-count log | Presence Test |
Administrative and Civic Ties
| Action | Purpose | Test Addressed |
|---|---|---|
| Obtain Puerto Rico driver’s license | Closer connection factor; demonstrates administrative tie to PR | Closer Connection |
| Register to vote in Puerto Rico; cancel mainland voter registration | Voter registration is a significant connection factor and closer connection factor | Presence (Alt. 5), Closer Connection |
| Move primary banking to Puerto Rico | Closer connection factor | Closer Connection |
| Update mailing addresses to Puerto Rico | Designated address on forms and documents | Closer Connection |
| Register vehicles in Puerto Rico | Location of personal belongings; Form 8898 factor | Closer Connection |
| File Form 8822 (Change of Address) with IRS | Updates IRS records; supports residency position | Closer Connection |
Business and Professional Ties
| Action | Purpose | Test Addressed |
|---|---|---|
| Establish principal place of business in Puerto Rico | Required to satisfy tax home test | Tax Home |
| Close or restructure any mainland U.S. office | Eliminates tax home outside PR; eliminates §865(e)(2) office attribution risk | Tax Home, Income Sourcing |
| Engage Puerto Rico-based professional advisors (doctors, dentists, attorneys, accountants) | Closer connection factor | Closer Connection |
| Join social, civic, and professional organizations in Puerto Rico | Closer connection factor | Closer Connection |
Family
| Action | Purpose | Test Addressed |
|---|---|---|
| Relocate spouse and minor children to Puerto Rico (where possible) | Family location is a significant connection factor and a key closer connection factor | Presence (Alt. 5), Closer Connection |
| Enroll children in Puerto Rico schools | Supports family relocation; note: minor children in U.S. as students may qualify for the student exception under Treas. Reg. §1.937-1 | Closer Connection |
Five Alternatives for the Presence Test
Under Treas. Reg. §1.937-1(c), you must satisfy at least one of the following:
| Alternative | Requirement | Key Limitation |
|---|---|---|
| 1. 183-Day Rule | Present in PR at least 183 days in the taxable year | Not prorated for partial years |
| 2. 549-Day Rule | Present in PR at least 549 days over 3 years (current + 2 prior), with at least 60 days each year | 30-day constructive presence days do not count toward 60-day annual minimum |
| 3. 90-Day U.S. Limit | Present in the U.S. no more than 90 days in the taxable year | Days in foreign countries do not count against you |
| 4. Earned Income Limit | No more than $3,000 U.S.-source earned income and more days in PR than in U.S. | Primarily applicable to retirees; foreign travel days do not count as PR days |
| 5. No Significant Connection | No permanent U.S. home, no U.S. voter registration, no spouse/minor child with principal abode in U.S. | Any one connection disqualifies you from this alternative (but other alternatives may still work) |
Income Sourcing Quick Reference
| Income Type | Source Rule | PR-Source? |
|---|---|---|
| Personal services compensation | Where services are physically performed | Yes, if performed in PR; allocated by working days if split |
| Interest | Residence of the obligor | Yes, if payor is PR-based |
| Dividends | Based on corporation’s income origin | Yes, if corporation derives 80%+ income from active PR business |
| Capital gains (personal property) | Seller’s tax residence (§865 general rule) | Generally yes; watch for office rule (§865(e)(2)) |
| Rental income | Situs of the property | Yes, for PR real property |
| Royalties | Where intangible is used | Yes, if IP is used within PR |
| Inventory sales | Where title passes (§865(b)) | Depends on title passage location |
| Software: services | Where services are performed | Yes, if development/work done in PR |
| Software: copyrighted article sale | Seller’s residence (§865) | Generally yes for PR resident seller |
| Software: copyright license/royalty | Where IP is used | Only if end use is in PR |
Key Act 60 Tax Benefits Summary
| Benefit | Tax Treatment | Decree Required |
|---|---|---|
| Capital gains accrued after establishing PR residency | 0% (federal and PR) | Chapter 2 |
| Pre-move capital gains (asset sold within 10 years of PR residency) | 5% PR tax only | Chapter 2 |
| Pre-move capital gains (asset sold after 10 years of PR residency) | 0% | Chapter 2 |
| Interest and dividends (post-move, PR or non-U.S. source) | 0% | Chapter 2 |
| Export services net income | 4% fixed PR corporate tax | Chapter 3 |
| Distributions from export service entity to PR-resident shareholders | 0% | Chapter 3 |
| Personal services income (performed in PR) | Excluded from federal tax under §933 | Bona fide residency required |
| Personal services income (performed in U.S.) | Fully taxable by U.S. at regular rates | No benefit applies |
Filing Obligations
| Filing | Filed With | Purpose |
|---|---|---|
| Form 8898 | IRS | Required in year of establishing or ending PR bona fide residence (if worldwide income ≥ $75,000) |
| Form 1040 (Federal) | IRS | Report worldwide income; exclude PR-source income under §933 |
| Puerto Rico Income Tax Return | PR Dept. of Treasury | Report PR-source income; claim Act 60 benefits |
| DDEC Annual Report | PR DDEC | Document decree compliance (residency, donations, property purchase) |
| Form 8822 (Change of Address) | IRS | Update IRS records when changing address to PR |
Key Federal Statutory and Regulatory Provisions
| Provision | Subject |
|---|---|
| IRC §937(a) | Bona fide residency definition for U.S. possessions |
| IRC §937(b) | Possession-source income rules |
| IRC §933 | Exclusion of PR-source income for bona fide PR residents |
| Treas. Reg. §1.937-1 | Three-part residency test: presence, tax home, closer connection |
| Treas. Reg. §1.937-2 | Possession income sourcing rules |
| IRC §§861–865 | General income source rules (applied by substitution for possession sourcing) |
| IRC §865 | Personal property sales sourced to seller’s residence; office attribution rule |
| Treas. Reg. §1.861-18 | Software transaction classification |
| Treas. Reg. §301.7701(b)-2(d) | Closer connection factors |
| REG-109813-11 (2015) | Proposed 30-day constructive presence rule for international travel |
This reference is for educational purposes only and does not constitute legal or tax advice. Individual circumstances vary. Consult a qualified tax attorney before making decisions based on this information.
Riefkohl Law advises Act 60 decree holders on all aspects of residency compliance, income sourcing, and decree maintenance. Schedule a consultation to discuss your specific situation.