Defending Your Act 60 Decree Against Depreciation Recapture Challenges

The IRS has been explicit: its examination of Act 60 returns includes a focus on the "disposition of assets and depreciation recapture." This is not a theoretical risk; it is an active enforcement priority. When you sell a depreciated asset, the gain attributable to those deductions must be recognized as ordinary income, not tax-free capital gains. An error here is a red flag that can trigger a full-blown Hacienda or IRS audit. In the current climate, simply hoping your numbers are correct is not a strategy. You need a proactive defense. Act60Shield provides that defense. Our system is designed to stress-test your tax positions, specifically simulating the scrutiny an auditor would apply to your asset sales. We analyze your depreciation schedules and sales transactions to create a clear, documented trail that substantiates your reporting. This is the level of preparation required to confidently face inquiries from tax authorities. For those who understand that the best defense is a good offense, our tool provides the critical evidence needed to fortify your compliance posture before it is ever questioned.

Your defense strategy must account for the different types of assets you own. Section 1245 property, which includes most business equipment and tangible personal property, carries the highest risk. The rule is unforgiving: all prior depreciation is recaptured as ordinary income upon sale. There is no ambiguity for an auditor to exploit if your records are pristine. Our platform helps ensure they are, by flagging every asset sale that falls under this rule and verifying the recapture calculation, creating an audit-ready file. Section 1250 property (real estate) presents a more complex challenge, involving nuanced rules around "unrecaptured Section 1250 gain" and the history of depreciation methods used. An auditor may challenge your characterization of the gain, especially for properties owned prior to your move to Puerto Rico. Act60Shield is engineered to address this complexity head-on. It models the application of both U.S. and Puerto Rico tax law to your real estate transactions, providing a clear rationale for your tax position. This documentation is invaluable in demonstrating to tax authorities that you have performed your due diligence and have a reasonable basis for your filing.

The single greatest point of failure for Act 60 decree holders is the incorrect sourcing of income. The IRS knows this. As noted in the GAO report on Puerto Rico (GAO-26-107225), the rules for determining whether income is from U.S. or Puerto Rico sources are complex and often misapplied. When you sell an asset, the sourcing of that sale dictates which government has the right to tax the recapture. Getting it wrong can lead to accusations of tax evasion. Act60Shield was built to mitigate this specific risk. Our system analyzes the factors that determine income sourcing—such as the asset's location, where it was used, and your tax home—to build a robust, defensible position for every transaction. We document the "why" behind your sourcing decision, creating a contemporaneous record that is far more powerful than trying to justify your position years later during an audit. For serious decree holders, this level of proactive defense is not optional; it is essential to protecting the benefits you worked so hard to obtain.