Bona Fide Residency: The Three Tests That Decide Everything
Every dollar of Act 60 benefit rests on one federal question: are you a bona fide resident of Puerto Rico under IRC §937 and Publication 570? Three tests answer it — presence, tax home, and closer connection — and you must pass all three, every year. The decree from DDEC does not answer it.
Watch — the three tests in 3 minutes
Test 1: Presence
Physical presence, most commonly ≥183 days in Puerto Rico during the tax year, with four alternate methods and narrow exceptions. Full mechanics, year-of-move rules, and state-side traps: the 183-day rule.
Test 2: Tax home
Your tax home— your regular or principal place of business or employment (or, if you have none, your regular abode) — must be in Puerto Rico, and generally you can't have a tax home outside PR during any part of the year (year-of-move exception aside). The recurring failure pattern: a decree holder who keeps running a mainland business from a mainland office, flying "home" to PR on weekends. The presence math might work; the tax home doesn't.
Test 3: Closer connection
The IRS asks where the center of your lifeis. No single item controls; the pattern does — a PR condo can't outweigh a stateside spouse, license, accounts, and clubs.
What gets weighed, and what proves it
The strong compliance posture is a running evidence file organized the way examiners think:
| Factor weighed | Evidence |
|---|---|
| Permanent home | Deed or lease, utility bills, property tax, homeowners insurance |
| Family | School enrollment, family residence documentation |
| Banking | PR account statements, local transaction history |
| Social, civic, religious & professional | Memberships, church, volunteer records, professional orgs |
| Personal belongings | PR vehicle registration, moving/shipping records, insurance schedules |
| License & voter registration | PR voter registration, PR driver's license, PR-address filings |
| Mailing address | PR-address correspondence and statements |
| Business & personal affairs | Where day-to-day affairs are actually conducted |
A gap in a category — say, zero banking activity for a quarter — is precisely what a closer-connection challenge exploits.
Form 8898 and the paper start line
The year residency begins (or ends), Form 8898 is generally required with the federal return when worldwide gross income exceeds $75,000 — a $1,000 penalty attaches to failures. It is the formal notice that the residency position exists.
Failing a test
Fail any test for a year and the §933 exclusion falls away for that year — covered income becomes federally taxable, with interest and penalty exposure, regardless of your standing with DDEC. This is why the IRS campaign targets residency rather than the decrees themselves.
Frequently Asked Questions
- Does the decree prove residency?
- No. DDEC grants the decree; the IRS independently tests residency. Both matter — see audits for who checks what.
- My spouse stayed stateside — is that fatal?
- It's one heavily-weighted factor, not an automatic failure, but it's among the most common patterns in failed positions.
- How long must I keep evidence?
- Audit windows extend years back; the working assumption for a 15-year decree is: keep everything, organized, for the duration.