How to Claim the Foreign Housing Exclusion for Expats

The Foreign Housing Exclusion complements the Foreign Earned Income Exclusion (FEIE), with both claimed on Form 2555. Together, they can significantly reduce your U.S. tax bill. The Foreign Housing Exclusion allows eligible U.S. expats to exclude or deduct qualified housing expenses from their taxable income and reduce their overall tax liability.

Eligibility for Foreign Housing Exclusion

To qualify for the Foreign Housing Exclusion, you must meet the following criteria:

• Tax Home in a Foreign Country. Your principal place of work must be in a foreign country, and your regular place of business should not be in the United States.
• Qualify for (and claim) the Foreign Earned Income Exclusion. You need to pass either the bona fide residence test or the physical presence test to qualify for the FEIE. The bona fide residence test requires that you reside in a foreign country for an uninterrupted period that includes a full tax year, while the physical presence test requires you to be physically present in a foreign country for at least 330 full days within a 12-month period.
• Employer-Provided Amounts. The exclusion applies to housing costs paid with employer-provided funds, which include wages or any other earned income taxed as foreign earned income. 

How the Foreign Housing Exclusion Works

The exclusion covers amounts paid with employer-provided funds, including any payments made to you or on your behalf by your employer that qualify as taxable foreign earned income (without regard to the FEIE).

For 2024, the maximum foreign earned income exclusion is $126,500, with the corresponding maximum housing exclusion set at $37,950. However, this amount can vary significantly based on geographic differences in housing costs. The IRS adjusts these limits annually, considering high-cost foreign locations. For example, Geneva, Switzerland, saw an increase of $9,100, while Tokyo, Japan, experienced a decrease of $3,900​.

TIP: If you’re living in a high-cost city, you might be able to exclude more than the standard housing amount. Check the IRS’s list of limits for specific locations. This could boost your exclusion and save you more on taxes.

What Are Qualified Foreign Housing Expenses?

Qualified foreign housing expenses include the following:

• Payments made for renting your home in a foreign country
• Fair market value of employer-provided housing
• Costs for utilities like electricity, gas, and water, excluding telephone charges
• Reasonable costs to maintain your rented property
• Real and personal property insurance premiums
• Taxes you must pay as a condition of occupancy, which are not deductible as property taxes
• Any non-refundable fees required to secure a lease
• Costs to rent furniture or accessories for your residence
• Expenses for parking near your residence

What Expenses Are Excluded?

Not all housing expenses are eligible. The following do NOT qualify as housing expenses:

• Principal or interest payments on a mortgage
• Expenses related to buying property
• Lavish or extravagant costs under the circumstances
• Payments for domestic help, such as maids or gardeners
• Costs that increase the value or prolong the life of your property

Foreign Housing Deduction vs. Foreign Housing Exclusion

If you are self-employed, you may qualify for the Foreign Housing Deduction instead of the exclusion. The deduction allows you to reduce your self-employment income by qualified housing expenses. However, the rules for calculating and claiming the deduction are similar to the exclusion.

Maximum and Limitations of Foreign Housing Exclusion

While the foreign housing exclusion provides significant benefits, it’s subject to certain limitations:

• Maximum Limit

The IRS caps the total amount you can exclude for housing expenses under the Foreign Housing Exclusion, and this limit varies depending on your location abroad. The IRS sets this limit at 30% of the Foreign Earned Income Exclusion (FEIE). For 2024, with the FEIE set at $126,500, the general maximum housing exclusion would be $37,950 (30% of $126,500).

However, this limit can be higher if you live in a high-cost area, as the IRS adjusts the maximum based on the local cost of living. For instance, expatriates living in cities like Tokyo or London might see their exclusion cap increased due to higher housing costs in those areas. The IRS provides an annual table detailing these housing cost limitations for various cities worldwide.

• Base Housing Amount

The Base Housing Amount is a standard deduction applied to your housing expenses before calculating the exclusion. This amount is set at 16% of the FEIE. For 2024, the base housing amount is $20,240 (16% of $126,500). This figure represents the portion of your housing expenses considered as ordinary and necessary, which cannot be excluded from your taxable income. In practice, only the housing expenses that exceed this base amount can be excluded.

How to Calculate the Foreign Housing Exclusion

Calculating the Foreign Housing Exclusion involves a few essential steps to ensure you maximize the exclusion while remaining compliant with IRS guidelines. Here’s a step-by-step guide:

1. Determine Your Qualified Housing Expenses: Start by adding up all your qualified housing expenses, such as rent, utilities, and property insurance. Make sure these expenses are necessary and directly related to maintaining your residence abroad.
2. Calculate the Base Housing Amount: The IRS sets a base housing amount, typically 16% of the FEIE. For 2024, the base housing amount would be $20,240. This base amount is considered the portion of your housing expenses that cannot be excluded from your taxable income.
3. Calculate the Maximum Housing Exclusion: To find the maximum amount you can exclude, subtract the base housing amount from your total qualified housing expenses. The IRS allows an exclusion of up to 30% of the FEIE for the tax year.

Example Calculation:
Suppose you’re an expat living in London with $45,000 in qualified housing expenses for the year. You would subtract the base housing amount of $20,240, leaving $24,760 eligible for exclusion. Since this amount is below the maximum limit of $37,950, you can exclude the full $24,760 from your taxable income.

4. Consider Location-Specific Adjustments: If you’re living in a high-cost area recognized by the IRS, your maximum exclusion might be adjusted upward to account for higher local housing costs. These adjusted limits vary by location and can significantly impact the amount you can exclude.
5. Divide by Days Abroad (if Applicable): If you did not spend the entire year abroad, you’ll need to prorate your exclusion based on the number of days you were outside the United States. For example, if you were abroad for 300 days, you would calculate your daily eligible exclusion amount and then multiply it by 300.

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How to Claim the Foreign Housing Exclusion

To claim the exclusion, complete Form 2555 and attach it to your tax return. The form includes sections to calculate your total exclusion and base housing amount.  This ensures you receive the maximum tax benefit.

TIP: Keep all your housing expense records, like receipts and leases, organized and easily accessible. This documentation can save you from headaches if the IRS ever asks for proof.

Common Misconceptions About the Foreign Housing Exclusion

1. Short-Term Assignments Automatically Qualify for the Exclusion

Many expats mistakenly believe that any duration of work abroad qualifies them for the Foreign Housing Exclusion. However, short-term assignments do not automatically meet the eligibility criteria. To qualify, you must establish a tax home in a foreign country and meet either the bona fide residence test or the physical presence test, which requires a longer commitment. Temporary assignments that do not establish a clear and lasting connection to a foreign location typically do not meet these standards.

2. Government Employees Are Eligible for the Foreign Housing Exclusion

Another common misunderstanding is that government employees working abroad, such as military personnel or diplomats, can claim the Foreign Housing Exclusion. In reality, government employees do not qualify because their income is considered U.S.-sourced regardless of their location. The exclusion is specifically intended for those earning foreign-sourced income, not U.S. government wages. 

3. You Can Claim Both the Foreign Housing Exclusion and the Foreign Tax Credit on the Same Income

Some expats believe they can simultaneously claim the Foreign Housing Exclusion and the Foreign Tax Credit on the same income. However, this is not allowed. If you exclude income using the FEIE or the Foreign Housing Exclusion, you cannot claim a Foreign Tax Credit on that same income. You must choose one benefit, which requires careful planning to determine the most advantageous option.

4. You Can Exclude Expenses Paid by Your Spouse

There is often confusion about whether you can exclude housing expenses paid by your spouse. The IRS rules are clear: only the housing expenses paid with your own foreign earned income qualify for the exclusion. If your spouse pays for the housing, you cannot claim those expenses under your exclusion, even if you file jointly.

5. You Must Live Abroad for the Entire Year to Qualify

You do not need to live abroad for the entire calendar year to claim the Foreign Housing Exclusion. The exclusion can be prorated based on the number of days you qualify under the bona fide residence or physical presence test. For example, if you lived abroad for nine months, you could still claim the exclusion for the qualifying period, prorated to reflect the time spent outside the U.S.

FAQs About the Foreign Housing Exclusion

1. Can I claim the Foreign Housing Exclusion if I don’t qualify for the FEIE?

No, you must first qualify for the Foreign Earned Income Exclusion before claiming the Foreign Housing Exclusion.

2. What if my housing expenses exceed my income?

The Foreign Housing Exclusion is limited to the amount of foreign earned income you have. If your housing expenses exceed your income, you can only exclude up to the amount of your earned income.

3. Can I claim the exclusion for expenses paid by my spouse?

Only housing expenses paid with your foreign earned income are eligible. You cannot claim those expenses under your exclusion if your spouse pays for the housing.

4. Do I need to live in the same house for the entire year to qualify?

No, you can claim housing expenses for any period during which you qualify for the FEIE, even if you change residences.

5. What happens if my housing expenses are considered extravagant?

The IRS can disallow part of your exclusion if it determines that your housing expenses are lavish or extravagant under the circumstances.

6. Can I claim the exclusion if I only lived abroad for part of the year?

Yes, you can prorate the exclusion based on the days you qualify for the Foreign Earned Income Exclusion during the year. The base amount and maximum exclusion will also adjust proportionally.

7. How do location adjustments affect my exclusion?

The IRS adjusts housing limits annually to reflect differences in local living costs compared to the United States. Check the latest IRS notices or consult a tax professional to determine the specific limit for your location.

8.  What happens if my housing expenses are below the base amount?

If your total qualified housing expenses do not exceed the base housing amount ($20,240 for 2024), you cannot claim the Foreign Housing Exclusion.

9. Can I include all of my housing costs in the calculation?

No, only qualified expenses are allowed. This includes rent, utilities (excluding telephone), and repairs, excluding mortgage principal payments, domestic help costs, and improvements that increase your property value.

10. Can I claim the Foreign Housing Exclusion and the Foreign Tax Credit on the same income? 

No, if you exclude income using the FEIE or the Foreign Housing Exclusion, you cannot also claim a Foreign Tax Credit on that same income​.

Expert Help for Your Expat Tax Needs

Claiming the exclusion can make a big difference in your tax savings, but it’s essential to get it right. We’re here to assist if you’re feeling uncertain about the process or want to ensure you’re maximizing all available benefits. Our team is ready to provide clear, expert guidance tailored to your situation. Don’t let confusion cost you—schedule a consultation with us today!