Bona Fide Residency in Puerto Rico
To qualify as a bona fide resident of Puerto Rico, an individual must satisfy three primary tests: the presence test, the tax home test, and the closer connection test.
Illustrative Example: Sarah’s Journey to Residency
Sarah, a U.S. citizen from Massachusetts, works at a private equity firm. Married with two children, she learns about Puerto Rico’s tax benefits and decides to relocate to capitalize on these incentives.
- Presence Test: Sarah meets the requirement by spending over 183 days annually in Puerto Rico.
- Tax Home Test: With her primary business operations based in Puerto Rico, she satisfies this criterion as well.
The Closer Connection Test Explained
To pass the closer connection test, Sarah must demonstrate stronger ties to Puerto Rico than to the U.S. or any foreign country. This involves evaluating numerous factors, including:
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Travel and Residency: Sarah spends only 1–2 weeks per year outside Puerto Rico and the U.S., eliminating stronger connections to foreign countries. However, her extended stays in the U.S. and ties there require careful consideration of whether her connections to Puerto Rico are more significant.
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Relevant Regulations: The closer connection test is guided by Code §7701(b)(3)(B)(ii) and Treas. Reg. §301.7701(b)-2(d). These rules examine ties to determine an individual’s strongest affiliation.
Sarah must also file Form 8898 to document her bona fide residency in Puerto Rico, especially providing detailed answers in Part III regarding her connections.
Key Considerations for Meeting the Test
Permanent Home
The location of Sarah’s permanent home is a major factor. For instance:
- If Sarah retains her Massachusetts home and doesn’t sell or lease it while living in Puerto Rico, this could indicate substantial U.S. ties.
- Alternatively, if she stays with family or rents temporary accommodations during U.S. visits, these ties may appear weaker.
Owning a permanent residence in Puerto Rico that is available year-round strengthens her case significantly.
Family Location
The location of close family members is critical.
- If Sarah’s spouse and children live most of the year in Puerto Rico and are enrolled in local schools, this supports her claim.
- Conversely, frequent travel to the U.S. by her family may weaken her argument.
For unmarried individuals or those with extended family, the residence and activities of these relatives can also influence the analysis.
Personal Belongings
The placement of personal items, such as heirlooms, furniture, and valuables, provides insight into connections.
- If Sarah purchases new furniture in Puerto Rico and leaves sentimental items in Massachusetts, this could suggest ongoing ties to the U.S.
Other Indicators
Sarah should also consider the following actions:
- Obtain a Puerto Rican driver’s license.
- Register to vote in Puerto Rico.
- List Puerto Rico as her residence on all official documents.
While these steps are relatively simple, they can add weight to her residency claim when combined with stronger indicators.
Duration of Stay
Though not explicitly stated in the regulations, the length of time Sarah resides in Puerto Rico may impact the IRS’s evaluation.
- If Sarah returns to the U.S. after a short stint in Puerto Rico, the IRS may view her connections to Puerto Rico as temporary or transactional.
An IRS auditor might scrutinize these ties further, especially if Sarah’s residency claim coincides closely with Puerto Rico’s tax benefits timeline.
Strategic Planning for Residency
To strengthen her bona fide residency claim:
- Limit Permanent Residences: Maintaining a single primary residence in Puerto Rico is ideal.
- Ensure Family Presence: Immediate family members should spend most of the year in Puerto Rico.
- Engage Locally: Active participation in Puerto Rico’s social, cultural, and professional communities is essential.
By documenting regular activities in Puerto Rico and minimizing ties to the U.S., Sarah can enhance her closer connection argument, ensuring compliance with the residency requirements and mitigating risks during potential audits.