Selling your company before or after the Puerto Rico move

The most expensive 90 days of your career

A founder who calls in February with a March LOI and a July close has already made most of the decisions that will determine their effective tax rate. By the wire date, the residency clock, the sourcing of each dollar of gain, and the installment-sale election are either working for them or against them. The spread is routinely 15 to 25 points of federal tax on an eight-figure exit.

Act 60's headline 0% on PR-source capital gains tempts founders into a simple model: move first, sell second, save everything. The actual rule is messier. Whether your sale is PR-source, US-source, or split turns on when you became a bona fide resident, when the gain "accrued" under Treasury's allocation regs, and when you receive each dollar of proceeds. The closing date is only one of those dates, and rarely the most important.

This post walks through the three timing scenarios founders face, what IRC §933 and the §937 regs actually do to sale gain, where §865 and §453 quietly bite installment sellers and earnout recipients, and the LOI-timing trap that shows up in almost every rushed M&A timeline. Planning explainer, not tax advice.

1. The three timing scenarios

Almost every founder exit splits into one of three patterns:

(A) Sell as a US resident, then move. Sign and close in Year 0, relocate in Year 1 to shelter the next business or the deferred comp tail. The sale itself is fully US-source, taxed at 20% LTCG + 3.8% NIIT (plus state). Act 60 does nothing for the sale gain. It still matters for earnout, rollover equity, and deferred comp, but the core exit number is locked at US rates the day you sign.

(B) Sign LOI, move, close after bona fide residency. The scenario most founders ask about, and the one with the highest variance. The appeal: if you close in a year you are a bona fide PR resident for the entire year, §933 could exclude the PR-source portion. The hidden problem: how much is "PR-source" is governed by the §937 allocation regs, not by where you live on closing day. [VERIFY: §933 limits the exclusion to PR-source income, and Pub. 570 Ch. 3 applies the §937 regs (including the 10-year look-back at Treas. Reg. §1.937-2(f)(1)) to determine how much pre-residency build-up is clawed back to US-source]

(C) Move, hold or build, sell years later. Relocate, establish residency, grow or restart the company from PR soil. Post-move appreciation has the cleanest path to PR-source under §933, especially if you mark basis to FMV at move-in where the regs allow. Pre-move appreciation is still allocated, but its share shrinks every year you hold past the move.

Scenarios B and C are where the savings are. Scenario B is also where the worst surprises live.

2. What §933 actually says about capital-gain sourcing

IRC §933 excludes from US gross income "income derived from sources within Puerto Rico" for a bona fide PR resident "during the entire taxable year." Both prongs matter independently: PR-source and full-year bona fide resident.

For capital gains on stock or LLC interests, "PR-source" is not defined by where you sat when you signed. It is defined by the §937 regs, which treat the gain as accruing over your holding period and apportion it between US-source and PR-source buckets. [VERIFY: §933 limits exclusion to PR-source income, and Pub. 570 Ch. 3 carves out gain attributable to pre-residency build-up via the "10-year look-back" rule under Treas. Reg. §1.937-2]

The result: even a clean Scenario-B sale (bona fide resident for the full year of closing) does not zero out federal tax on your founding equity. Gain that built up while you were a US resident keeps its US-source character and stays subject to the 20% + 3.8% stack.

3. Pre-move vs post-move appreciation: a worked example

Take a realistic founder profile.

• Founded the company in 2019 with $5M of "founding equity" basis (rolled SAFE, founder common, whatever -- the basis math is the same).
• Establishes bona fide PR residency on January 1, 2024, five years in.
• Sells the company in 2026 for $20M of stock proceeds. Total holding period: 7 years (5 pre-move, 2 post-move). Total gain: $15M.

Under the §937 default allocation method -- straight-line by holding period -- the gain is apportioned by the ratio of US-resident days to total holding-period days. [VERIFY: linear apportionment per Treas. Reg. §1.937-2(f)(1)(vi) is the default allocation method for gain on non-marketable interests; the marketable-securities mark-to-market election under §1.937-2(f)(1)(vi)(A) is a separate regime]

Bucket	Years	Share	Gain	Source	Federal rate
Pre-move build-up	5	5/7	$10,714,286	US	20% + 3.8% NIIT
Post-move build-up	2	2/7	$4,285,714	PR	0% under Act 60

Federal tax on the US-source piece: 23.8% × $10.71M = $2.55M. PR-source piece, assuming valid Act 60 grant and full-year bona fide residency: $0.

Blended effective federal rate on the full $15M: ~17%, not 0%. Still a real save versus the all-US baseline of $3.57M, but not the $3.57M of savings a naive calculator quotes.

Every additional year you hold past move-in shifts the ratio. A founder who moves in 2024 and sells in 2031 (5 pre-move, 7 post-move) flips the math -- 7/12 becomes PR-source. The post-move years do the real work.

4. Earnouts and installment sales

Scenario B's technical risk is deferred consideration: earnouts, escrows, seller notes, §453 installment elections.

The default installment-sale rule recognizes gain as payments are received, not at closing. [VERIFY: §453(i) recapture rules accelerate ordinary-income recapture into the year of sale even under an installment election; this matters most for asset deals with §1245/§1250 property] Sounds friendly to PR-bound founders: push recognition into post-move years, get more of the gain received while a PR resident.

The problem is §865.

[VERIFY: §865(a) general rule: gain from the sale of personal property by a US resident is sourced to the US; §865(g)(1) defines "United States resident" for §865 purposes using a tax-home test that is not identical to §933 bona fide residency. §865(g)'s 10-year look-back can re-source gain back to the US if the seller was a US resident at any point in the preceding 10 years, with narrow exceptions for PR active-business stock under §865(g)(3).]

Even if you receive earnout payments in 2027 as a bona fide PR resident, the §865 10-year rule plus §937 allocation can pull a slice back to US-source. The installment election does not convert pre-move build-up into PR-source; it only controls when already-allocated gain is reported.

What installment treatment does not trigger: §877A mark-to-market. [VERIFY: §877A mark-to-market does not apply to PR moves -- only to covered expatriates relinquishing US citizenship or long-term green-card status. A PR move under §933 is not an expatriation event.] One of the few unambiguously good rules for PR-bound founders.

For earnouts: model each tranche under both installment and lump-sum-elect-out treatment, and have your CPA run the §937 allocation against the residency calendar before signing. The right answer for a 40/40/20 earnout is rarely the same as for a 100%-at-close deal.

5. The LOI timing trap

The most expensive mistake we see: signing an LOI with material economic terms locked (price, escrow, earnout, close window) while still a US resident, then moving to PR to close as a PR resident.

The risk is not statutory. No Code section says "LOI signed as a US resident means full US-source." The risk is the constructive sale and economic-substance doctrines. A fixed purchase price, ministerial closing conditions, and a counterparty already in diligence starts to look like a completed sale even if legal closing slips into your PR-resident year. [VERIFY: this is practitioner consensus on constructive-sale exposure under §1259 and economic-substance challenges to residency-driven sale timing; Rev. Rul. 80-26 addresses the related "binding contract" question for installment-sale purposes but is not directly on point for §933 sourcing]

The concern for M&A tax counsel is not that IRS will unwind the closing date. It is that they will recharacterize sourcing, treating the gain as accrued through the LOI date when the deal was effectively priced, and pull most of it back to US-source under §937.

Defensive posture: avoid a binding LOI with locked economics until you have already established bona fide PR residency, and keep genuine open terms, diligence outs, and price flex through closing.

6. The cleanest path

If you can choose your timing (and many founders can, even if it does not feel like it on day one), the highest-probability path to the lowest effective rate is:

1. Move 24+ months before any LOI conversation. Builds the bona fide residency file (183-day, tax-home, closer-connection tests) and starts the post-move appreciation clock.
2. Let the company appreciate from PR soil. Each year past move-in shifts the §937 ratio in your favor.
3. Mark basis to FMV at move-in where the regs allow. The marketable-securities election under §1.937-2(f)(1)(vi)(A); not available for most private stock, but where it is, the single highest-leverage move.
4. Negotiate the deal as a PR resident. No US-resident LOI, no locked term sheet, no mainland handshake.
5. Run §865 and §937 allocation against the residency calendar before signing. Your CPA should hand you a spreadsheet of post-tax proceeds under three closing dates before you sign.

The founders with the cleanest exits treat the move and the sale as one 36-month project, not two independent transactions.

Get a /compare snapshot for your sale year

We built /compare to make the pre-move vs post-move split visible at the line-item level. Plug in founding basis, projected sale price, move-in date, and target close -- it returns the §937 allocation, federal tax on the US-source piece, and Act 60 treatment of the PR-source piece, side by side. Not tax advice, not a substitute for your CPA. It is the spreadsheet you should have on the call with your M&A lawyer.

Run it before the LOI lands in your inbox.