Lifetime Gifts in Puerto Rico and How They Affect the Estate

Many parents and grandparents in Puerto Rico prefer to help their children while they are still alive: they put the house in a child's name, give them the down payment for an apartment or transfer a piece of land. It is a generous decision and, done well, it can make things much easier. But a gift (donación) is not an isolated act: the Código Civil (Civil Code) takes it into account when the time comes to divide the estate.

This guide explains which taxes apply, how a gift is formalized and how it affects the other heirs' forced share.

Do you have to pay tax to make a gift in Puerto Rico?

No, for gifts made since January 1, 2018. Ley 76-2017 eliminated Puerto Rico's gift tax; the Código de Rentas Internas (Internal Revenue Code) says it is not imposed on gifts made after December 31, 2017 (Sec. 2041.01(c)). Gifts made before 2018 were subject to a 10% tax.

What may remain is a reporting obligation. When gifts to the same person add up to more than $10,000 in a year, the giver must file Modelo SC 2788 B, Planilla Informativa de Donaciones (gift information return) no later than January 31 of the following year (Sec. 2051.02(e); CC RI 19-07). The return describes the asset, its good-faith estimated value and the giver's tax basis. No tax is paid with it.

How to make a valid gift

The Civil Code sets strict formal requirements (Art. 1313):

• Real estate: the gift must be made in a public deed (escritura pública) before a notario (in Puerto Rico, a notary is an attorney), describing the property, its value and any charges the recipient takes on. Without a deed, the gift is void from the start (radicalmente nula).
• Personal property (money, a car, jewelry): the gift can be oral if the item is handed over at the same time. If it is handed over later, the gift must be in writing, describing the item and stating its value.

In addition:

• The recipient must accept, and the giver must learn of the acceptance while both are alive (Art. 1310).
• You can only give property you own now, and you must keep enough to live on (Art. 1312).
• A gift can be revoked only for specific reasons, such as the recipient failing to meet the charges, refusing to support the giver or committing acts that are grounds for unworthiness or disinheritance (Art. 1320). The right to revoke expires 6 months after the giver learns of the reason (Art. 1321).

Lifetime gifts are final. Once the house is recorded in your child's name, it belongs to your child: they can sell it or mortgage it, and their creditors can go after it. If what you want is for the house to pass to your children while you keep living in it, talk to a notario about alternatives such as reserving the usufruct (the right to use it for life), a will or a trust (see trusts in Puerto Rico).

The limit: no one can give away more than they can leave by will

Art. 1312 says it clearly: "No one may give by gift more than they may dispose of by will." If you have children or a spouse, half of your estate is the legítima (forced share), and gifts cannot be used to leave a forced heir without their share.

To check this, the Code requires a calculation when the giver dies (Art. 1787):

1. Take what the person leaves at death, valued at the time of the partición (division of the estate), and subtract debts and charges.
2. Add the gifts that count (donaciones computables), valued at the time they were made.
3. Calculate the forced share (one-half) and the free portion (the other half) on that total.

Imputation: what replaced collation

Under the 1930 Code, children had to "collate" (colacionar), that is, bring back into the estate what they had received during the parent's lifetime. The 2020 Code no longer uses that word; it now speaks of imputation of gifts (imputación de liberalidades) (see 2020 Civil Code vs. the 1930 Code).

• Gifts to forced heirs (children, spouse): deducted first from their forced share; anything above that is charged to the free portion (Art. 1789).
• Gifts to other people (a nephew, a friend, a church): charged to the free portion (Art. 1790).
• If a gift goes beyond what fit, it is excessive (inoficiosa) and can be reduced.

Excessive gifts and the 10-year rule

Only a forced heir can request the reduction of an excessive gift; not the recipient, the legatees or the deceased's creditors (Art. 1791). If you did not set a different order, the will's provisions are reduced first and, if that is not enough, the gifts, from the most recent to the oldest (Arts. 1318 and 1792). The person who received the gift can avoid the reduction by paying the forced heir the shortfall in cash (Art. 1793).

These do not count for this calculation (Art. 1788):

• customary gifts, such as birthday or Christmas presents;
• spending on food, education and medical care for relatives up to the fourth degree;
• gifts made 10 years or more before the death.

The Code does not set an express deadline for requesting the reduction. If you believe a gift affected your forced share, talk to a lawyer soon.

Tax basis: a detail that matters when you sell

Tax basis is, in simple terms, the cost that is subtracted from the sale price to calculate the gain subject to income tax.

• In an inheritance from someone who died after December 31, 2017, the heir keeps the basis the causante (the deceased person whose estate it is) had; in Puerto Rico there is no longer an automatic increase in basis at death (Sec. 1034.02(a)(5)(D)).
• In a gift, Hacienda (the Departamento de Hacienda, Puerto Rico's Treasury) asks on the information return for the asset's adjusted basis in the giver's hands, calculated under Sec. 1034.02. Before giving away an asset that has gone up a lot in value, ask an accountant what the recipient's basis will be.
• For federal tax purposes, which may apply if there are assets or income in the United States, the general rule for gifts is that the recipient keeps the giver's basis (26 U.S.C. § 1015), while inherited property generally takes its value as of the date of death (§ 1014).

That is why, from a tax point of view, giving an asset during your lifetime is sometimes not the same as leaving it in your estate. See taxes of the estate.

CaudalRelicto.com is an independent guide. It is not Puerto Rico's Departamento de Hacienda, the courts or any government agency. This page is general information, not legal advice from an attorney who knows your case. Names and figures in examples are hypothetical. Found an error? Tell us.