Treasury Regulations, Subchapter A, Sec. 1.933-1T

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(a) General rule—(1) An individual (whether a United States citizen or an alien), who is a bona fide resident of Puerto Rico during the entire taxable year, shall exclude from gross income the income derived from sources within Puerto Rico, except amounts received for services performed as an employee of the United States or any agency thereof.

(2) The following example illustrates the application of the general rule in paragraph (a)(1) of this section:

Example.   E, a United States citizen, files returns on a calendar year basis. In April 2005, E moves to Puerto Rico, purchases a house, and accepts a permanent position with a local employer. For the remainder of the year and throughout 2006, E continues to live and work in Puerto Rico, and establishes a closer connection to Puerto Rico than to the United States or any foreign country. In September 2007, as a result of the termination of his employment in Puerto Rico, E sells his house and moves to State J. E is entitled to the exclusion provided in section 933 for 2006, but not for 2005 or 2007 (assuming that during the first quarter of 2005 and the last quarter of 2007, E has a tax home outside of Puerto Rico or a closer connection to the United States or a foreign country).

(b) [Reserved] For further guidance, see §1.933–1(b).

(c) Deductions and credits. In any case in which any amount otherwise constituting gross income is excluded from gross income under the provisions of section 933, there shall not be allowed as a deduction from gross income any items of expenses or losses or other deductions (except the deduction under section 151, relating to personal exemptions), or any credit, properly allocable to, or chargeable against, the amounts so excluded from gross income. For purposes of the preceding sentence, the rules of §1.861–8 shall apply (with creditable expenditures treated in the same manner as deductible expenditures).

(d) Definitions. For purposes of this section:

(1) The rules of §1.937–1T shall apply for determining whether an individual is a bona fide resident of Puerto Rico.

(2) The rules of §1.937–2T shall apply for determining whether income is from sources within Puerto Rico.

(e) Effective date. This section shall apply for taxable years ending after October 22, 2004.

[T.D. 9194, 70 FR 18934, Apr. 11, 2005]