Delaying my decree effective date as the tax benefits haven't been worth it for me yet

I have a question regarding capital losses rolling over. I’m talking to a CPA but wanted to get you all’s opinion.

About my situation:

  • I arrived in May of 2021 and claimed the year of the move exception in 2021 to make my BFR-PR date Jan 1 2021
  • I meet the requirements for BFR-PR for 2021 and 2022.
  • I applied for a decree in 2021. That application is still being reviewed, and is in good standing.
  • I have PR-sourced (bought after Jan 1 2021) capital losses in 2022

I’m looking for ways to utilize those PR-sourced losses.

  1. My understanding is that you can’t use PR-sourced losses to reduce your IRS tax bill. The only way to reduce your IRS tax bill with those losses is to make them US sourced. Is this correct?

  2. I have heard PR sourced losses can offset PR sourced gains. If true, This wouldn’t be very useful for a decree holder, since you would offset gains that would be taxed at 0% anyway.

  3. is it even possible to make those losses US sourced? My intent was to be a BFR-PR for 2021 and 2022, and I have met all those requirements. So my date of BFR-PR is Jan 1 2021, not later on the date of my move, meaning you were a PR resident for the whole year and all assets purchased in 2021 or 2022 in my case are PR-sourced

  4. Delaying my decree effective date to 2023 or later will not change the fact that those are PR-sourced and therefore not rollover-able. Aborting my application entirely will similarly not allow me to utilize those losses, given that they are still PR-sourced. Plus aborting the application has other consequences, like not being able to utilize year of the move exception for 3 more years. Potentially there are issues with applying again in the future?

  5. even if I find a way to make those assets US-sourced, and rollover-able, those wouldn’t impact my tax bill until I realize gains on US-sourced assets

Any advice or additional details would be much appreciated

  1. you can rollover taxable PR-sourced losses, that is, PR-source losses realized in a year where your decree wasn’t effective. These losses can only offset taxable PR-source gains with the same aforementioned requirements.

  2. see above

  3. see response below

  4. correct, see below

  5. correct, see below

After talking with JJ Crespo of Zenith advisors:

All your assets purchased in 2021 and 2022 are PR-sourced.

You cant in good faith opt out of BFR-PR for 2021 or 2022 and make assets bought in those years US-source, given that it was your intention to live in PR and your closer connections, etc are here. That will not stand up to IRS or PR scrutiny. This means there’s no way to US-source assets bought in 2021 or 2022.

These PR-sourced losses can still be rolled over and used to offset taxable PR gains (meaning Act 60 can’t be effective for the year they are sold).

You are able to amend your in-review decree application to change the effective date to 2023 or later, saving compliance costs and triggering IRS/PR clawbacks for 2021 and 2022. JJ says usually such amendments are usually by people who haven’t established BFR-PR for reasons out of their control, but there’s no reason in principle that such an amendment wouldn’t be approved if you have no other red flags. (though perhaps they will want me to submit a $5000 new application fee instead of a $450 amendment fee, and give up any advantages of a 2021 vs 2023 decree). It will take at least another year or so to hear back about the acceptance of said amendment. There shouldn’t be any issues applying for Act 60 twice, and there are no issues being a PR resident for 2021-2022 as the decrees only stipulate that you aren’t a PR resident from 2006-2012.

PR-sourced assets bought as a BFR-PR in 2021 or 2022 will not be entirely exempt from PR taxes if sold in a year when your act 60 decree is effective. PR-source appreciation after your effective date is tax free; PR-source appreciation before your effective date is taxed at normal PR rates. Your gains on marketable and unmarketable securities are therefore bifurcated similarly to how the IRS mentions in their special election in publication 570

This implies that you can remain a resident of PR, use up your rollover losses without a decree, wait until you have a year with significant gains, amend your decree to be effective jan 1 of that year, and enjoy 0% rates on PR-source appreciation that occurred in that year or later, and begin compliance that year.

You can amend your decree to be effective starting any year on or after your application date. More on that in this post:

There are open questions about the implications of waiting a long time to amend the decree, whether this may worsen your standing with the DEDC and make them less inclined to approve an amendment.

Reminder to add post on amendments