We will discuss the recent trend of wealthy investors relocating to Puerto Rico. For example, why so many billionaires and so many businesses are relocating to Puerto Rico. We will also talk about the tax benefits of relocating to Puerto Rico, the American real estate bubble, the COVID-19 crisis and predictions for real estate prices in 2021.
Many experts are predicting the real estate market in 2021 will be in decline. However, after the COVID-19 lock down in the United States in 2020, things seemed to calm down. In early 2021, the American stock market prices were higher, real estate prices were going up in many places and things seemed to be improving. So why leave when things are on the up swing?
Why People and Businesses Are Relocating to Puerto Rico
Debt, Mortgages and Home Foreclosures in the United States
First, let’s look at some statistics and information to help explain shifting populations:
- Total Debt to GDP for the United states is over 150%
- The Federal Reserve currently owns approximately 30% of all mortgages in the U.S. today (over $2 Trillion)
- US National Debt is now over $26 Trillion
- Home foreclosures are beginning to increase
Alarming Trends at the Federal Reserve and Debt-to-GDP Ratio
Two alarming trends are that the debt-to-GDP ratio is at 150% and that the Federal Reserve Bank owns 30% of US mortgage securities. First, most experts agree that when the debt-to-GDP ratio climbs higher than 100%, you are in the economic danger zone. Historically, high debt-to-GDP ratios have ended badly.
Second, everyone should be concerned that the Federal Reserve Bank owns more than 30% of mortgages in the US. Although the Federal Reserve is not a government agency, it acts similar to a government organization and as a central bank. The question remains as to why a central bank should hold such a large amount of debt on its books.
Home Foreclosures on the Rise with National Debt
Finally, home foreclosures on unpaid mortgages are beginning to increase. Many people are currently in mortgage forbearance. As a result, owners are not making payments and not being punished for no payments (avoiding bank foreclosure). And, national debt is always a big concern for nations. Eventually, all our debt must be repaid.
In contrast, it’s important to note that home sales are up. In addition, prices on homes throughout the United States are up as well. Moreover, many people would say that we are in a real estate boom. As a result, there has been a trend up for prices and actual sales in real estate for numerous years.
Real Estate Market Predictions
The Perfect Storm of Low Interest Rates, High Demand and Low Supply Has Arrived; People are Emigrating from Larger Cities to Smaller Ones
According to real estate analyst Neil McCoy-Ward, the American real estate boom will not last. Momentum in the real estate market has caused houses to sell at record high prices. In addition, houses are selling quicker than normal. Mr. McCoy-Ward is anticipating a slowdown in home sales beginning in 2021. Furthermore, he anticipates that in late 2021, prices will come down and the bubble in home prices will begin a decline.
Mr. McCoy-ward stated that this is “the perfect storm,” creating higher home prices. For example, he credits the market frenzy of buying and selling of homes to low interest rates, high demand for homes and low supply. He recommends staying out of the market as a buyer unless you intend to stay in the home for many years and you want to take advantage to low interest rates for mortgages.
The last time that home prices peaked in the United States was in the Summer of 2006. Sometime later, real estate prices began a decline in price. Finally, a crisis soon followed and the decline ensued. But the housing market crash predicted in 2021 may be more severe.
The Subprime Mortgage Crisis
“The United States subprime mortgage crisis was a nationwide financial crisis that occurred between 2007 and 2010, and contributed to the U.S. financial crisis. It was triggered by a large decline in home prices after the collapse of a housing bubble, leading to mortgage delinquencies, foreclosures, and the devaluation of housing-related securities.” -Wikipedia.com
The subprime mortgage crisis led to the Great Recession of 2007-2009.
Real Estate Bubble
Unemployment, Low Interest Rates and Coronavirus Had a Big Impact on the Economy
The United States real estate market has been growing at a very past pace for years. Some would call this growth a bubble. In this case, the bubble has formed because credit is easily accessible for most people who want to buy a home.
Interest rates for home mortgages are at historical lows. According to Bankrate, the interest rate on a 30-year mortgage averages around 3%. Some people would argue that interest rates are lower now than at any time in history. This is a pretty big deal and things can’t remain this way forever.
According to the Bureau of Labor Statistics, 13% of Americans were unemployed in May 2020. In addition, 30 Million Americans filed for unemployment benefits in June 2020, approximately 10% of the entire US population (Source: CNBC News).
The COVID-19 outbreak of 2020 has had big impacts on the US economy. Big layoffs and job losses have occurred continuously in 2020. For example, Disney and MGM have laid off thousands of workers. These layoffs mean that these former employees will be struggling to make ends meet and won’t be buying new homes.
A Tale of Two Cities: Real Estate Market Predictions
Americans are Moving away from States Like New York and California in Large Numbers
It’s important to understand that real estate prices are decreasing in many markets. However, each market is different between states and cities in the US. For example, it appears that in the short term, a divided real estate market may present itself.
Current data being reported in the media shows people leaving larger coastal cities and going to smaller inland cities. For example, Californians have been moving out of California to places like Washington, Arizona and Texas in record numbers. This is not a new phenomenon and the trend appears to be gaining speed.
People are Fleeing West Coast and East Coast Cities for Less Populated, Low Tax, Low-Regulation Places
As a result, larger coastal cities like Los Angeles and New York City are seeing reductions in demand for real estate as residents leave the cities permanently. In turn, smaller cities like Phoenix and Las Vegas are experiencing higher demand for real estate as residents move in from the coastal cities. These areas are where the housing market crash 2021 will likely hit hardest.
It appears that in the short term, cities where people are relocating to (like Las Vegas) may see higher prices during the coming real estate bubble deflation. The worst-case scenario for cities receiving the influx of those moving from elsewhere would be that property values would remain steady.
Finally, it is clear that many individuals are leaving higher-tax, higher-regulation states like New York and California. In turn, they are relocating to Puerto Rico, as well as other states such as Florida, Arizona, Idaho and Tennessee.
Puerto Rico Income Tax
In general, Puerto Rican citizens are taxed similarly to the US. In fact, many citizens pay a social security tax. However, in Puerto Rico, citizens are exempt from paying taxes to the IRS in the United States, which is part of the reason that smart investors are relocating to Puerto Rico. Instead, Puerto Rico has its own taxing agency like the IRS that collects taxes from citizens.
Relocating to Puerto Rico
Puerto Rico is not part of the 50 American states. Instead, Puerto Rico is a U.S. Territory. Its government is very similar to the United States. Like the US, it has 3 branches of government. Puerto Rico has executive, judicial and legislative branches. First, Puerto Rico has a government made up of a House of Representatives and a Senate. It has an elected Governor who governs the island as the executive power. Leaders in the House, Senate and Governor’s Office are elected every 4 years.
Spanish is the official language in Puerto Rico. And although Puerto Ricans share some commonalities with Americans, they have established their own culture and ethnicity.
Taxes in Puerto Rico
As previously stated, since Puerto Rico is not one of the 50 states of the United States, its citizens are exempt from paying income tax to the U.S. IRS. In addition, corporations based in Puerto Rico are not generally subject to corporate taxes levied in the United States. Finally, if you are a US Citizen who becomes a permanent resident of Puerto Rico, you are exempt from paying US income taxes.
Why are people relocating to Puerto Rico? Well, in 2008 Puerto Rico passed legislation to encourage individuals and businesses to conduct business in Puerto Rico. As a result, Act 20: The Export Services Act and Act 22: The Individual Investor Act were passed into legislation. As of 2020, these acts have now been consolidated into Act 60. Thus, the relocating to Puerto Rico began as a tax savings solution.
Act 20: The Export Services Act
Pay Taxes of 0-4% for Service Industry Businesses
This act can be utilized by any citizen of any country. It allows businesses and individuals to reduce their corporate taxes to only 4%. In addition, the act allows dividends to be paid at 0%. Yes, you read that correctly – 0% tax rate!
Essentially how this works is quite simple. Let’s say you are an American business owner and you want to pay lower taxes. You simply incorporate a business in Puerto Rico which provides a service. The service can be provided to anyone, either inside or outside of Puerto Rico. Your tax rate then falls to 4%. Poof!
Examples of types of businesses that are considered “service” businesses may include consulting, internet services, software engineer, legal services, etc. In addition, by following the Puerto Rico tax rules, you do not pay any US taxes.
Act 22: The Individual Investor Act
Pay Taxes as Low as 0% for Investment Income
This act allows for US Investors who normally pay capital gains taxes on investments to take advantage of lower tax rates of 0%. For example, if you buy and sell equities such as stocks you can re-locate to Puerto Rico and be considered exempt from the capital gains taxes. In addition, cryptocurrency trading is also exempt from tax assessment.
One of the small requirements of Act 22 is that you donate $5,000 – $10,000 to official charities of Puerto Rico. In addition, you are required to purchase a residence in Puerto Rico. This is one example of how you have to spend some money to take advantage of relocating to Puerto Rico and the associated tax benefits.
In addition, both Act 20 and 22 require an annual filing fee that has recently increased from $300 to $5,000. However, it’s still considered a great deal for anyone with a significant income from the services industry or investments. The tax savings alone more than cover the expense in most cases.
Retiring in Puerto Rico
If you expect to have significant gains on investments during retirement, Puerto Rico may be a good fit for you. Resident retirees in Puerto Rico can enjoy potentially tax-free benefits from investment income.
To become a resident, you must simply move to Puerto Rico and set up a permanent residence. You are required to live in Puerto Rico a minimum of 183 days per year (slightly more than half a year). Americans could potentially share time between Puerto Rico and still visit family and friends at home in the United States with no issues. Relocating to Puerto Rico can help you take advantage of the tax savings opportunity.
Living in Puerto Rico
How Puerto Rico is Different from the United States: Cultural and Geographical Differences
In many ways, Puerto Rico is much like visiting another country if you are a native of the United States. You can expect to eat different foods, speak a different language and experience what it’s like to live on an island. Life is different from the United States in Puerto Rico. As a result, we recommend visiting the island several times first before making the permanent move.
Additionally, Puerto Rico has special concerns that should be considered. For example, as an island in the middle of the ocean, Puerto Rico experiences hurricanes and tropical storms regularly. For example, in September 2017, Hurricane Maria, a Category 5 storm struck Puerto Rico with deadly force, killing almost 3,000 people and shutting off power for weeks. Hurricane Maria was one of the worst storms to ever strike the islands, costing the island an estimated $91 Billion in damage.
Power outages and utility outages are a common problem in Puerto Rico. The island has an aging infrastructure that frequently has problems and needs upgrading. In addition, political corruption has been a problem for Puerto Rico for decades. As a result, much needed infrastructure repair and other improvements have not occurred. Clearly, relocating to Puerto Rico is not always a paradise.
Puerto Rico’s Financial Crisis
For years, Puerto Rico has struggled with mounting debt problems. In 2012, the territory suffered a credit downgrade, which makes it more difficult to borrow money to finance infrastructure improvements or even function as a government. Second, Puerto Rico has an aging population that requires government services such as medical care and retirement pensions. Finally, in 2016 the United States approved Puerto Rico’s request to move toward bankruptcy with the new “Promesa” law. The bankruptcy proceedings are an ongoing issue for Puerto Rico.
A Note About Tax Savings in Puerto Rico
Given the changing and volatile political climate in the United States, it is unclear for how long the tax savings of Act 20 and 22 will last. There is clearly a growing populist movement in the United States that wants to increase taxes on investors and business owners. This is not a big surprise to any student of history. Populism movements have played out many times in the past. Venezuelan politics under the Hugo Chavez was one example of this.
Even if you are not prepared to move to Puerto Rico, you may seriously consider beginning the application process for Act 20 and/or Act 22. Getting your “foot in the door” with an application may be a smart move if US legislators move to block US Citizens from these juicy tax incentives. As a result, the relocating to Puerto Rico for tax benefit may only exist for a limited time.
Find More Help on Relocating to Puerto Rico
One fantastic resource for getting more answers on relocating to Puerto Rico related to Act 20 and 22 can be found at Sovereign Man. Simon Black, founder of Sovereign Man is an investor and entrepreneur who helps people make more money, keep more money and increase their freedom. He has a great weekly newsletter that provides smart, actionable intelligence on how to get ahead financially.
In summary, relocating to Puerto Rico may not be for everyone. There are clear examples of how certain businesses and individuals can benefit from the low tax laws. Puerto Rico’s Act 20 and 22 have created a great opportunity for people to pay limited taxes while enjoying the island life.
2021 Housing Market Predictions
As a Mass Exodus from Big Cities Occurs, Unemployment is High and the COVID Black Swan Hits, the Real Estate Bubble Begins Deflating
Here’s what our real estate market predictions look like for 2021. It’s impossible to predict the future, especially with so many unknowns at play. What we know is that real estate has been in a bubble for years because of low interest rate mortgages. Prices have gone too high, too fast. As a result, what goes up, must come down. Prices will be reduced in our real estate market predictions. The question is how long it will last.
Second, we know that people are leaving big cities and going to smaller cities. This mass exodus will have positive results for the cities where people move to. The cities that the emigration leaves behind will suffer with lower demand, lower prices and deflation of markets. How long it lasts is unknown.
Third, we know that unemployment in the United States right now is around 10%. This is a conservative number and the real unemployment rate is probably much higher. As a result, people who don’t have jobs don’t buy houses. In addition, demand for real estate is weakened. This causes prices to fall.
Finally, a great Black Swan event occurred in 2020, which threw a wrench into the worldwide economy. COVID-19, and the reaction by governments worldwide is unprecedented. It will have lasting economic results for years to come. Real estate prices may suffer for several years during the housing market decline of 2021-2022. However, keep in mind that if you are located in a place where people are relocating to, prices may not go down.
Relocating to Puerto Rico Wrap Up
Hopefully we have provided valuable information and some explanation as to why people are relocating to Puerto Rico. Billionaires, businesses and individuals alike are relocating to Puerto Rico for financial reasons. In Puerto Rico, taxes are lower and government regulation is lower, which promotes job growth and personal freedom. As a result, Puerto Rico should continue to grow and prosper in the coming decade.
Disclaimer: It is important to note that Piggy Bank Coins does not provide financial advice. We do not endorse or recommend any financial investments. Instead, we provide information for educational purposes to those seeking knowledge regarding personal finance. However, in the spirit of transparency, note that the author is an investor in cryptocurrencies, precious metals and some equities.
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