The Act 22 for Locals. Puerto Rico's Private Equity Fund Deduction and the Real Estate Play
Act 22 rewarded the ones who moved here. This regime rewards the ones who never left. The Incentives Code's private equity fund chapter belongs to Puerto Rico residents, and it carries the largest personal deduction in the Code, up to 60 percent of the invested amount, alongside preferential rates on everything the fund earns. With DDEC's March order clarifying the rules of the game, the window for well-structured local funds is open, and real estate is where the capital wants to go.
KEY IMPLICATIONS
Act 22 Rewarded Arrival. This Rewards Staying.
The Individual Resident Investor decree was built for people coming from outside, and Act 38-2026 kept it that way, with its residency bars and its new six-year non-residency test. The firm's Individual Resident Investor resource covers that side of the Code. The other side belongs to residents.
The private equity fund chapter, successor to the Private Equity Funds Act of 2014 and now integrated into Act 60, the framework the firm has examined in how Act 60-2019 transformed Puerto Rico's financial landscape, is the regime a Puerto Rico investor can actually hold. It asks one thing the decree never asked, investment in Puerto Rico's private economy, and it pays for it with the most generous personal deduction in the Code.
The Benefit Stack
The statute scales the benefit to the commitment. A resident accredited investor in a Private Equity Fund deducts up to 30 percent of the invested basis, usable in the year the fund deploys the capital and the ten years following, capped each year at 15 percent of net income before the deduction. In a Puerto Rico Private Equity Fund, the vehicle concentrated on the island, the deduction rises to 60 percent of basis, the window extends to fifteen years, and the annual cap doubles to 30 percent of net income. A $500,000 commitment can produce up to $300,000 in deductions against the investor's other income. There is no other provision in the Code that hands a resident that.
The treatment of what the fund earns completes the stack. The investor's share of fund interest and dividends pays 10 percent. Capital gains the fund distributes arrive exempt. A sale of the fund interest itself pays 5 percent, and net capital losses pass through proportionally when the portfolio meets the Puerto Rico income test. Series LLC funds may elect treatment as a single fund across their series, so a sponsor can run a development equity series and a secured credit series under one qualification, one strategy per series, one regime over all of it.
The Real Estate Play
The regime is built to finance the active economy, and that is precisely its power for real estate. Qualifying investments are non-traded securities, equity and debt, and the statute's own text includes loans with their collateral, of entities earning at least 80 percent of their income from Puerto Rico sources or a Puerto Rico trade or business. A fund reaches its qualifying threshold, 15 percent of paid-in capital for the standard vehicle and 60 percent for the Puerto Rico fund, within four years of organization.
Map that onto the island's real estate economy and the strategy writes itself. Equity in the development company building the project. Equity in the construction business executing it. Equity in the hospitality operator running the asset. Mortgage-secured lending to all of them, since collateralized credit sits inside the eligible-securities definition by name. The regime points local capital at builders and operators, the qualifying percentage counts investments in active businesses, and that is exactly where the returns and the deduction meet. A fund built around projects, operators, and secured credit is a fund built the way the Code intends.
Clear Rules, Open Window
On March 11, 2026, DDEC issued Administrative Order 2026-002 in consultation with the Office of the Commissioner of Financial Institutions, the agency's operating manual for private equity funds under Act 60. Defined rules are what institutional capital waits for, a point the firm develops in its analysis of why Puerto Rico has become a destination for private equity investment.
The playbook has five items. First, the active-entity definition. The qualifying percentage comes from entities participating in a direct, continuous, and regular way in a Puerto Rico business, with 80 percent of gross income from that activity, and the order supplies examples and look-through rules for tiered structures. Second, in-kind contributions. Investors may contribute securities and notes, and the contributed asset, or its adjusted basis if sold, stays in the fund for 24 months, with sale proceeds reinvested within six months. Real property itself is not an eligible in-kind contribution, so the route into the fund is cash or securities, and the route to real estate runs through the fund's investments. Third, related parties. A fund's investment in an entity related to a 20 percent investor requires a documented economic justification showing new activity, expansion, or job creation, which for a developer seeding a fund that finances that developer's projects means building the substance file before the investment. Fourth, deduction timing. A cash contribution counts as invested when the fund deploys it into qualifying investments. Fifth, the net contribution rule and its safe harbor. Amounts returned to the investor as a fund loan within 120 days reduce the deduction base, and the full contribution remains deductible when a duly documented investment plan exists at the date of contribution, available for review by OCFI and the Office of Incentives. The order applies to contributions made after March 11, 2026, and funds with earlier grants may elect its provisions from the effective date of their decrees.
As the firm noted in its Puerto Rico chapter of the Chambers International Tax 2026 Global Practice Guide, the order remains operative and applied, and the agency's active oversight of the category is a feature for compliant sponsors, because a regime taken seriously is a regime whose benefits hold up.
What This Means
For local investors, this is the vehicle the Code built for you. The deduction is real, the rates are preferential, and both ride on the fund's continuing qualification, which makes the sponsor's discipline part of the diligence. Accredited status, the annual caps, the deduction-timing rules, and the fit with an investor's overall position deserve individualized analysis before capital moves.
For developers and operators, the regime is a financing channel hiding in plain sight. An active Puerto Rico project company is eligible inventory for fund capital, equity or secured debt, and the developers who organize that capital, or position their projects to receive it, are the ones who will build through the next cycle with local money. The investment plan the order rewards is a document worth drafting on day one.
For realtors, this is the demand engine behind the listings. Fund-financed developments, hospitality conversions, and construction pipelines are where this capital lands, and the professionals who can explain the 60 percent deduction to a local investor will be in the room when the projects get funded.
Maceira Zayas structures and advises private equity funds, their sponsors, and their investors through its Tax Law practice, and authored the Puerto Rico chapter of the Chambers International Tax 2026 Global Practice Guide, which covers Administrative Order 2026-002 and the fund regime discussed here.
Simón E. Carlo-Valentín, Esq., CPA, MBA · Co-author, Puerto Rico Chapter, Chambers International Tax 2026Maceira Zayas · San Juan, Puerto Rico · Washington, D.C.
This article is for informational purposes only and does not constitute legal or tax advice. Receipt of this publication does not create an attorney-client relationship.
Disclaimer: the author is also a principal at Stratagem Capital, a Puerto Rico Private Equity Fund.
