Is Buying A House In Puerto Rico A Smart Investment?

There are many reasons why buying a house in Puerto Rico could be a good investment. Firstly, as Puerto Rico is a US territory, there are no restrictions on Americans buying property on the island. The official currency is the US dollar, so investors based in the US save significantly when transferring capital to and from the island. The island also offers tax breaks and other perks for US buyers, such as no passport requirement for travel between Puerto Rico and the US mainland.

Puerto Rico has a strategic location, with direct flights to many major US cities, as well as international destinations. The island boasts beautiful beaches, a pleasant climate, and a high quality of life, with globally-renowned hotels, world-class golf courses, and a range of dining options.

However, there are also potential drawbacks and financial risks to buying property in Puerto Rico. In 2019, the country filed for bankruptcy, and buyers should be aware of the risks posed by extreme weather and the possibility of future financial instability.

Pros and cons of buying property in Puerto Rico

Puerto Rico is a popular place for US citizens to buy a second home, and it's easy to see why. The island boasts beautiful beaches, a pleasant climate, and a high quality of life. But is it a good investment? There are certainly pros and cons to consider.

Pros

• Strategic location: Puerto Rico's proximity to the US makes it a great place to conduct business. There are regular direct flights to many major US cities, and it's only a 2.5-hour flight to Miami and a 3.5-hour flight to New York.
• Currency and legal protection: As Puerto Rico is a US territory, investors save money by transferring capital in and out of the island using the US dollar. It also offers more legal protection than other countries in Latin America.
• Tax incentives: Puerto Rico offers several tax incentives to encourage economic development, including a flat income tax rate of 4% for businesses and a 0% tax rate for individuals. Dividends and capital gains are also exempt from taxes.
• High demand for hospitality: There is a high demand for hotels in Puerto Rico, with an estimated need to double the number of available hotel rooms in the next five years. This presents an attractive investment opportunity.
• Affordable housing necessity: There is a huge market demand for affordable housing developments in Puerto Rico, presenting another investment opportunity.
• Positive changes: The Puerto Rican government is working to rebuild the local economy, and the island's infrastructure is of a high standard.
• Easy access: Puerto Rico is easily accessible, with three airports offering direct international flights.
• High quality of life: Puerto Rico offers a high quality of life, with a pleasant climate, gorgeous natural beauty, and a range of amenities, including globally-renowned hotels, world-class golf courses, and delicious dining options.
• Lucrative rental market: Puerto Rico attracts some of the highest lodging rates in the Caribbean, making it a solid investment opportunity for those looking to rent out their property.

Cons

• Financial instability: Puerto Rico has experienced a serious debt crisis and filed for bankruptcy in 2019. Although the island emerged from bankruptcy in 2022, there is a risk of future financial instability.
• Extreme weather: Properties and their inhabitants are at risk from hurricanes and extreme heat, which can cause health risks and impact local infrastructure.
• High costs: The tax breaks that have attracted investors have also caused housing costs to skyrocket, leading to growing gentrification and unaffordable housing for Puerto Rican citizens.
• Bureaucracy: Buying property in Puerto Rico can be a bureaucratic nightmare, with a lot of time-consuming paperwork and higher rates than in the US.
• Safety concerns: While Puerto Rico is generally no more dangerous than the US, certain neighbourhoods may have higher criminal activity.

Tax breaks for US buyers

Puerto Rico has become an attractive prospect for US citizens seeking tax breaks. In 2012, the island, facing economic hardship, passed Act 20 and Act 22 to boost its economy and promote foreign investment. These Acts have made Puerto Rico a tax haven for qualifying US citizens.

Under Internal Revenue Code (IRC) §933, Puerto Rico-sourced income is excluded from US federal tax. US citizens who become bona fide residents of Puerto Rico can benefit from this. To be considered a bona fide resident, an individual must be physically present in Puerto Rico for at least 183 days during the taxable year, not have a tax home outside of Puerto Rico during the taxable year, and not have a closer connection to the US or a foreign country than to Puerto Rico.

Act 20 provides incentives for companies exporting services from Puerto Rico. A US citizen who moves their business to Puerto Rico may benefit from a 4% corporate tax/fixed income tax rate, a 100% exemption on property taxes, and a 100% exemption on dividends from export services. Services that are eligible for these incentives include research and development, advertising and public relations, consulting services, creative industries, and more.

Act 22 entices individual investors to move to Puerto Rico by offering a 100% tax exemption on all dividend and interest income, and long-term capital gains accrued after becoming a resident. Puerto Rico-sourced passive income is completely exempt from federal taxation, and new residents may even reduce the tax rate on non-Puerto Rico-sourced passive income.

In addition to Acts 20 and 22, Act 60 provides further financial incentives for Americans to move to the island permanently. To qualify for an Act 60 decree, individuals must become bona fide residents of Puerto Rico, which comes with strict rules. To establish bona fide residency, individuals must do the normal things they would if they moved to another state, such as registering to vote and obtaining a local driver's license. However, to qualify for the tax breaks, they must also establish their presence on the island. This means spending at least 183 days in Puerto Rico, or an average of at least 183 days over 3 years, with a minimum of 60 days in each year. There are occasional exceptions to this rule, such as after Hurricane Maria when the IRS gave people up to 117 days credit if they could not return to the island due to damage.

To maintain bona fide residency, individuals cannot have anything deemed a "closer connection" to a US state, including belongings or personal relationships. This may pose a problem for some who want to keep a house in the US and split their time between the two. Additionally, to qualify for the Act 60 decree, individuals must make a required donation of $5,000 annually to the government and two separate $5,000 donations each year to qualifying charities on the island.

The various tax incentives offered by Puerto Rico have resulted in a rush of investors flocking to the island, driving up home prices and displacing residents who can no longer afford to live in their hometowns.

Financial risks and drawbacks

There are several financial risks and drawbacks to consider before buying a house in Puerto Rico. Firstly, Puerto Rico has experienced financial instability, including a serious debt crisis that led to bankruptcy in 2019. While the island emerged from bankruptcy in 2022, triggering a boom in the local real estate market, there is a possibility of future financial instability.

Secondly, tax breaks and incentives that have attracted investors have also contributed to rising housing costs, leading to gentrification and unaffordable housing for Puerto Rican citizens. This has resulted in a demand for affordable housing developments, which may impact the potential for investment returns.

Thirdly, the process of obtaining a mortgage in Puerto Rico can be challenging, especially if you don't speak Spanish fluently. There is a significant amount of paperwork and higher rates compared to the US. It is also important to be cautious when using property listing databases as they may contain outdated or inaccurate information.

Additionally, there are complex inheritance laws in Puerto Rico that can complicate the process of selling a house. To sell a property, signatures from multiple heirs are usually required, and homeowners have little choice in who these heirs are due to family inheritance laws.

Lastly, extreme weather events, such as hurricanes and extreme heat, pose risks to properties and people's health. These events can cause damage to infrastructure and increase health risks, impacting the value and safety of real estate investments.

Access to US resources and infrastructure

Puerto Rico has access to many US resources and benefits from US infrastructure. As a US territory, it has strong ties to the US, with direct flights to many major US cities, including Miami and New York. This makes it a great location for US citizens to conduct business.

The island falls under US jurisdiction, so you don't need a passport to travel there, and the US dollar is the official currency. This means that US citizens buying property in Puerto Rico don't have to worry about fluctuating exchange rates affecting their purchasing power.

Real estate transactions, including the purchase of investment properties, are governed by US federal laws, which protect investors' assets and make it easier to acclimatize to the island. Mortgages, loans, and bank accounts also operate according to US laws and regulations.

Puerto Rico has access to US programs and resources in the case of a natural disaster. The island's infrastructure, such as water and power systems, roads, and bridges, adhere to US construction standards.

The US Department of Energy (DOE) has been working with Puerto Rico to strengthen the island's grid resilience and advance new initiatives to enhance its energy future. The DOE and six national laboratories have provided Puerto Rico energy system stakeholders with tools, training, and modelling support to enable the planning and operation of the electric system with greater resilience against disruptions.

The US government has also established a financial oversight board through the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) to help restructure the island's debt and stabilize its economy.

Positive changes in Puerto Rico

Puerto Rico is undergoing a period of positive changes, which could make it a good investment opportunity. Here are some of the positive changes currently happening in Puerto Rico:

Economic Incentives

The Puerto Rican government is working to rebuild the local economy after a period of financial decline. To encourage economic development, there are many tax incentives in place. For example, investors who decide to become Puerto Rican businesses pay a flat income tax rate of 4%, and individuals pay a 0% tax rate. Dividends and capital gains are also entirely exempt from taxes.

Strategic Location

Puerto Rico's location between the Caribbean Sea and the Atlantic Ocean makes it a great place to conduct business. It has strong ties to the US, with direct flights to many major US cities, and there are also direct international flights to Caracas, Madrid, Frankfurt, London, and Panama City, among others.

High Demand for Hospitality

There is a high demand for hotels in Puerto Rico, with an estimated need to double the current number of available hotel rooms in the next five years. This demand calls for more hospitality investments and development projects on the island.

Affordable Housing

There is a huge market demand for affordable housing developments in Puerto Rico. Thousands of Puerto Ricans face homelessness, and the tax breaks that have attracted investors from the mainland have caused housing costs to skyrocket, leading to growing gentrification and unaffordable housing for citizens.

Positive Changes to Infrastructure

Puerto Rico has excellent infrastructure, with high-speed internet, reliable phone services, and cloud services. The island's infrastructure, such as water and power systems, roads, and bridges, adheres to US construction standards.

High Quality of Life

Puerto Rico offers a high quality of life, with a pleasant climate, gorgeous natural beauty, and enchanting coral reefs. It has globally-renowned hotels, world-class golf courses, and an array of dining options. The island is also lush with natural attractions, including pristine, white sand beaches and El Yunque National Forest, which houses multiple rare species.

Frequently asked questions