Billionaire hedge fund manager John Paulson, who was born, raised and became insanely rich in New York, is seriously considering a move to Puerto Rico, according to recent reports. He isn’t the only wealthy person thinking of packing his bags. Under a year-old law, Paulson’s move to Puerto Rico would save him hundreds of millions of dollars in taxes that he would otherwise have to pay on capital gains made investing his $9.5 billion fortune. Small-business owners should take note because you don’t have to be a billionaire to take advantage of this opportunity.
The reason for the sudden interest in Puerto Rico among high-net-worth individuals is a law that in effect eliminates all taxes on capital gains. Puerto Rico is a territory of the United States and has a mixed tax policy. Some types of income are taxed by the federal government and other types are taxed locally. Residents of Puerto Rico must pay taxes to the federal government on dividend and interest income, but taxes on capital gains are paid to the local government at a rate of 10 percent. This compares to rates ranging from 23.8 to 39.6 percent in the U.S. The new law eliminates that 10 percent capital gains tax through 2035 for people who move to Puerto Rico and spend at least 183 days per year living there.
A small-business owner in New York City about to sell their business for a profit of $10 million would be subject to federal, state and local capital gains taxes that would eat away $3.27 million of that fortune. By simply moving to Puerto Rico and establishing residency there before selling, the owner would pay zero capital gains taxes and keep the entire $10 million. Any capital gains made on the reinvested $10 million would also be free of capital gains taxes. Note that you don't have to move the business; only the owner of the business needs to relocate.
This law makes it very tempting to move to Puerto Rico if you are about to sell your business. You are still within the United States with all of the same protections that you would have living on the mainland, you can enjoy some great weather and you would pay zero capital gains taxes.
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