Renewed Calls to Close Puerto Rico Tax Loophole

A group of House Democrats introduced a resolution in late October taking aim at a Puerto Rican tax regime they say is disrupting the island’s housing market and being used by wealthy Americans to evade taxes.

The “United with Puerto Ricans Opposed to Act 22 Risks” (UPROAR) Act (H.Res. 1553) targets Puerto Rico’s Act 22, which provides those who newly reside in Puerto Rico with preferential tax treatment when they meet certain conditions. Those conditions include purchasing a house in Puerto Rico within two years, residing in Puerto Rico for at least six months each year, and contributing at least $10,000 annually to a local nonprofit.

Those who apply for and obtain an Act 22 decree receive a total exemption from Puerto Rico taxes for income, interest, dividends, and capital gains realized after they became a resident. And a provision of the U.S. Tax Code, Code Sec. 933, provides further benefits to these taxpayers by exempting from U.S. federal income tax “bona fide” Puerto Rico residents’ income derived from “sources within Puerto Rico.”

Enacted in 2012 and folded into another law in 2019 (Act 60), Act 22 was intended to encourage wealthy taxpayers to relocate to Puerto Rico to spur investment in real estate and services. But resolution sponsor Representative Delia Ramirez (D-IL) and 11 Democrat co-sponsors say the law is driving up housing prices in Puerto Rico and encouraging tax evasion.

Housing market impacts.

According to co-sponsor Representative Nydia M. Velázquez (D-NY), Act 22 is “fueling displacement, rising prices, and reckless development across the island.”

“[T]he influx of wealthy Americans seeking tax breaks has oversaturated the housing market, driving up housing prices and reducing availability for long-term residents,” reads the resolution. It goes on to assert that “Americans seeking a tax shelter in Puerto Rico contributed to a 600-percent increase in rent prices from July 2022 to September 2023.”

A report published the same day in the Cambridge University Press Journal of Race, Ethnicity, and Politics looks at discrimination against Puerto Ricans in the Puerto Rican housing market. Author Giovanni Castro Irizarry faults Act 22’s requirement to buy property on the island as a condition for receiving the favorable tax treatment.

Castro Irizarry says that unlike Puerto Ricans, those buying up property for Act 22 purposes are “willing to pay cash to speed up the process and secure the purchase at a price above the appraised value.”

But the problem goes deeper, says Castro Irizarry. “Not only do foreign investors buy luxury properties to live in but they also invest in properties that the average Puerto Rican can afford, for purposes of speculation or short-term rentals on the platform Airbnb.”

Tax evasion.

Beyond the housing supply impacts of Act 22, many contend those claiming tax exemptions are not satisfying residency requirements or are erroneously reporting U.S.-source income as being Puerto Rico-sourced.

According to Velázquez, “the law has led to tax avoidance on the mainland, depriving the federal government of billions of dollars of critical revenue.” She called for “a whole of government approach” looking into Act 22 and mitigating damages.

The IRS initiated an Act 22 beneficiary audit campaign in 2021. However, the agency has been reluctant to share details on its findings and enforcement efforts.

In March 2023, a coalition of advocacy groups, including the Center for Popular Democracy, submitted a Freedom of Information Act (FOIA) request to the IRS seeking records related to the agency’s Act 22 enforcement efforts. Velázquez then led up a November 2023 letter to IRS Commissioner Danny Werfel, urging him to “expedite processing” of the request.

However, a full year after receiving the FOIA request, the IRS responded by saying it had located over 3,000 pages of relevant records but was withholding all pages due to FOIA exemptions. The agency denied the Center for Popular Democracy’s appeal of that decision this August.

On October 17, 2024, the Center for Popular Democracy filed suit in the U.S. District Court for the District of Columbia, seeking an order that the IRS provide the records.

For more information about who qualifies as a bona fide resident of Puerto Rico, see Checkpoint’s Federal Tax Coordinator ¶ O-1085. For more on federal taxation of income from sources within Puerto Rico, see ¶ O-1450 et seq.