We Wanted to Know More About Act 22, So We Went to Puerto Rico to Investigate
As traders, investors, and digital nomads, our curiosity gets piqued when we hear things like, "It's the perfect place for traders." or "If you work remotely, you have to check it out." In this case, these loaded statements are in reference to Act 22 of Puerto Rico. At first we let it go in one ear and out the other, but lately, we've been hearing buzz like this more and more. It's gotten to the point that we decided this interesting law was worth investigating in person. Or maybe we just needed an excuse to visit an island paradise. Regardless, we once again did some research, lined up some people we wanted to talk to while we were there, loaded our backpacks, grabbed our cameras and laptops, and jumped on a flight to San Juan.
Remember the grade school rhyme, "In 1492 Columbus sailed the ocean blue." While he didn't make it here on his first round, Columbus did come to Puerto Rico on his second voyage in 1493. He named the island San Juan Bautista after Saint John the Baptist. While we won't argue the devastation the Spanish brought to the Caribbean through disease, slavery, and war, we will thank them for finding this place and leaving their cultural influence here. What's different about Puerto Rico is their totally unique "Puerto Rican" culture. The French, Dutch and British also have had their influence here, and in the last 100+ years, the United States. Since 1917, Puerto Ricans have been citizens of the United States, able to enjoy freedom of movement between the island and the mainland. Approximately 1000 miles southeast of Miami, Puerto Rico offers tropical weather, beautiful scenery, incredible food, and cultural diversity like none other. And since 2012 it's also a unique tax shelter for investors and entrepreneurs. As wanderers, we travel a lot, but there's something special about Puerto Rico in general, and Old Town San Juan in particular. We recommend you bump this destination up on your "need to visit" list.
So what is Act 22? Act 22 is known as the Act to Promote the Relocation of Investors to Puerto Rico. It is an act created by the Puerto Rican government that fully exempts local taxes on all passive income generated by individuals that reside in Puerto Rico. The act was created to encourage the immigration of high-net-worth individuals to the island with the hope that they would bring their investment dollars with them. It was initially slow to catch on, but lately it has been gaining popularity to the point where it is causing property prices to rise in some areas and stop falling in others. Act 22'ers also spend money on restaurants, shops, and leisure activities. They improve the properties they buy, purchase vehicles to drive, and employ the services of local people. In other words–22 is working to help rebuild the locally hard-hit economy just as the Puerto Rican law makers had hoped.
Walking along the beach one afternoon, I struck up a conversation with an Act 22’er. “Don’t wait” he told me. “Something like this is too good to be true for long, and they’re already trying to change it.” He went on to tell me how he got sick of the high taxes he was paying while living in FL. He heard about Act 22, and decided to check it out. Now living in Humacao, he still finds it difficult to believe that he gets to wake up every morning in paradise, practice his craft, and keep the proceeds. His tax savings alone more than pay for his entire cost of living on an annual basis. Viewed through that lens, you can say he enjoys a tropical paradise on the government’s dime.
Anyone who lives off of capital gains should take the time to study Act 22. As more and more investors move to Puerto Rico, it has already captured the attention of some in Congress who wish to end the “tax breaks for the wealthy.” For now, it is available, and qualifying individuals can trade their cash accounts while paying zero capital gains or dividend taxes. Plus, when done correctly, it’s completely legal. This isn't a sketchy shell-company scheme. It's a legal act created to benefit the local Puerto Rican economy, and it's working. Currently, in the US, only IRA holders can enjoy tax-free gains, but there are restrictions on when the money can be withdrawn. Under Act 22 those that are too young to draw on their IRA’s can still trade an account tax free.
The difference Act 22 has on a trading account cannot be overstated. Compare a $500k account with a 20% annual return of a trader under act 22 against one that is subject to short term capital gains tax and is in a 35% tax bracket. Assuming all else is equal on both except for the tax burden, after five years of gains, the Act 22 investor’s account is worth $1,244,160. The other person's account is worth $921,160. That's a $323,000 difference in just 5 years. The difference in the account’s value alone would buy a nice house with a water view on much of the island. Looked at that way, the Puerto Rican government wants you so much, they’ll go so far as to fund your home if you stay long enough.
"After five years of gains, the Act 22 investor’s account is worth $1,244,160 or
$323,000 more than an account that had to pay 35% taxes annually."
You're probably thinking that it sounds great in theory, but what's the reality like? Where do you live when you're there for your required annual time? With its bright colors and unique charm, Old Ttown San Juan offers unique apartment or condo living, while those with families tend to gravitate towards Dorado or Humacao. With Dorado's real estate market skyrocketing, Act 22’ers are now targeting Humacao. Housing prices in Humacao are still cheap by US standards. While Dorado's prices have doubled, tripled, and even quadrupled, Humacao has experienced a decade of falling prices that only recently began to stabilize. Hurricane damage from Maria in 2017 is still visible in much of the area. The place is buzzing with construction crews repairing landscaping, repainting exteriors, repairing roofs, and rebuilding homes and condos that look like they have been sandblasted from the storm. We spent several days in Humacao, and the rebuilding effort is by no means a lackluster affair. It's a serious effort indicating that Humacao is far along on the path of regrowth.
Keep up with the Wanderer Crew No Matter Where We Go
Let's switch from Lorin in Puerto Rico to Pat in Mexico where he writes,
"I've been running across this character quite a bit while wandering around Isla Mujeres the past couple of months. This picture gives me the feeling that he may be the most content and relaxed person on the island. Maybe I need to stop and ask him one of these days.
Not everyone's goal in life is to hang out on an island in floral print shirts, wacky sunglasses, and a complete state of chill. But it's fair to say that most of us go about our day-to-day lives in a mood far from where our ideal would put it. So how can we all do better?
For me it's about location. Sun and sea salt air are almost always a good starting point. Coffee with my wife each morning on the top deck of our boat is also a morning ritual that allows us to start the day off in the right frame of mind before markets open and kids need tending to. I find my mood is much better, and my daily results much more in line with where I want them to be, when I begin the day from a walk instead of a sprint.
What are you doing to reach the "state of Zen" that I imagine the guy in this picture has found?"
Need some inspiration? Our Facebook page is full of inspiring photos and messages from the entire Wanderer community. Check it out and post a photo, share a story, or send us a message.