Tax colonialism drives up housing prices, entrenches poverty

These are boom times for investors flocking to idyllic towns all over Puerto Rico, some of them seeking to take advantage of tax incentives intended to attract new people and outside money to the cash-strapped island, which is working its way out of bankruptcy. The tax breaks’ appeal accelerated after the coronavirus pandemic prompted many companies to shift to remote work, inspiring Americans who live on the mainland to move to more temperate climes.

But the influx of the affluent new settlers, who must acquire residency and buy property in Puerto Rico within two years of moving in order to keep the tax breaks, has pushed up home prices and displaced residents who can no longer afford to live in their hometowns. Hurricane Maria, which heavily damaged thousands of homes in 2017, had already prompted many residents to leave the island.

The real estate boom, which began in San Juan, the capital, has extended across the island, as investors have started to move away from the metropolitan area and into smaller towns like Rincón.

There are new arrivals beyond those seeking tax breaks who are also snapping up properties and driving up rents and home prices. But it is the finance and tech investors who have formally applied for tax-break status who have drawn the most attention.

Many of them are cryptocurrency traders, who now hold weekly happy hours at a seaside bar in Rincón. A new barbecue food truck that opened in August accepts Bitcoin, Ethereum, Cardano, Shiba Inu, Solana and Litecoin for its mainland-style chicken.

The creeping gentrification troubles many Puerto Ricans, who have become increasingly more forceful in questioning how an economy reliant on tax breaks for the wealthy can work for local residents increasingly unable to afford property.

“It feels like Hurricane Maria placed a ‘For Sale’ sign on the island,” said Gloria Cuevas Viera, a Rincón resident who is helping to lead the fight against gentrification.

Luis Daniel Lugo Orsini, owner of the Chicken Shack BBQ, a food truck that accepts six forms of cryptocurrency as payment. “There’s a lot more movement in town than before,” he said.Credit...Erika P. Rodriguez for The New York Times

Many investors buy residential properties and then resell them at higher prices or turn them into short-term vacation rentals, turning entire neighborhoods into Airbnb corridors and creating a shortage of inventory for local residents. Forty-three percent of Puerto Ricans live under the federal poverty level.

Israel Matos, 45, will have to move out of his Rincón home by March because the property owner sold it last year. Mr. Matos had an option to buy the house but it expired. The owner, who is from Hermosa Beach, Calif., decided to sell to someone else.

Mr. Matos has lived in the home with his wife and two daughters for two years, and said he cannot find a single listing in Rincón that matches his budget.

“The pressure as a father is incredibly difficult,” said Mr. Matos, a sound engineer for a television station. “I never thought I would be in the situation of having a hard time looking for a roof to live under with my daughters. And it’s all because I don’t have $100,000 in the bank.”

Recently, dozens of demonstrators gathered in Old San Juan to protest the tax breaks. They congregated in front of a former children’s museum that the Bitcoin billionaire Brock Pierce has turned into a “crypto clubhouse.” Protesters graffitied the building with “Brock Pierce is a colonizer” and “Gringo go home.”

The tax breaks fall under a law known as Act 60, a version of which was initially enacted by the Puerto Rico government under another name in 2012, as the island faced a looming economic collapse. The incentive drew more interest after 2017, when Hurricane Maria decimated the island. In 2019, the tax breaks were repackaged to attract finance, tech and other investors.

People who move to the island can benefit from a reduction of income taxes on long-term capital gains, dividends, interest and revenues from their services. In Silicon Valley, a billboard advertises Puerto Rico as “a tech hub in sync with your vision.”

As of October, Puerto Rico had received 1,349 applications in 2021 — a record — from people looking to become resident investors. Of those, 982 had been approved. In all, more than 4,286 applications have been approved since 2012, with more than 35 percent of them approved in the last three years.

Under the law, an investor can qualify for the tax breaks if he or she has not been a resident of Puerto Rico for at least 10 years prior. The investor must also buy a home to qualify for relief from taxes on capital gains, dividends, interest and revenues from services. The more than three million Puerto Ricans already living on the island do not qualify for those tax breaks.

“This is creating inequality in terms of taxpayer responsibility,” said Heriberto Martínez Otero, the executive director of the Ways and Means Committee in the Puerto Rico House of Representatives.

Renters forced out by soaring housing prices along the coast may move to cheaper neighboring towns but may have to spend more on gas and tolls to commute, said Mr. Martínez Otero, who also teaches economics at the University of Puerto Rico.

Owners who sell their homes, of course, have benefited from a rise in property prices, and Gov. Pedro R. Pierluisi has applauded the fact that many investors are buying luxury homes — a collapse in the luxury real estate market was a key motivation for passing the tax law, he said in January.

“What was intended was an influx of people with capital to give life to the real estate market,” he said.

Large numbers of people leaving the island had also been a concern for policymakers. Hammered by both the economic crisis and Hurricane Maria, the island’s population declined 11.8 percent from 2010 to 2020, according to the census.

“But the fact that there are people buying residential properties that do not meet the reality of consumption patterns in Puerto Rico joins the rest of the problems on the island that hinders affordable housing,” Mr. Martínez Otero said.