What is the Foreign Housing Exclusion?

The Foreign housing exclusion or deduction (FHE) can be a valuable benefit for U.S. citizens living abroad by reducing taxable income by accounting for qualified housing expenses incurred in a foreign country. As housing costs can be extremely expensive in many parts of the world, expats who plan wisely can create significant savings using this provision.

Available to expats who meet the eligibility criteria for the Foreign Earned Income Exclusion (FEIE), the FHE can provide significant tax relief, especially for those living in areas with high housing costs.

To qualify, you must meet either the Bona Fide Residence Test or the Physical Presence Test. The Bona Fide Residence Test involves establishing residency in a foreign country for a full tax year, while the Physical Presence Test requires spending at least 330 full days in a foreign country within a 12-month period.

The exclusion applies to expenses such as rent, utilities (excluding phone costs), and certain related costs. However, luxury items, such as televisions or internet, are not covered.

The base housing amount is generally 16% of the FEIE limit, calculated annually. Housing costs exceeding this base amount may be excluded from income, up to a maximum specific to the city or country where you reside. For example, high-cost cities like Tokyo or London have greater allowances, allowing expats there to exclude more housing expenses.

As noted at Foreign housing exclusion or deduction on IRS.gov:

"The foreign housing exclusion applies only to amounts considered paid for with employer-provided amounts, which includes any amounts paid to you or paid or incurred on your behalf by your employer that are taxable foreign earned income to you for the year (without regard to the foreign earned income exclusion). The housing deduction applies only to amounts paid for with self-employment earnings."

Foreign Housing Exclusion: Qualifying and Non-Qualifying Expenses

The lists below gives a brief rundown on expenses that do and do not qualify under the Foreign Housing Exclusion.

Qualifying Expenses

• Rent
• Utilities (excluding telephone costs)
• Property insurance
• Repairs and maintenance
• Furniture rental
• Parking fees
• Mortgage interest (for owned homes)
• Property taxes (if not claimed under SALT)

• Purchase price of a home
• Telephone, cable, and internet bills
• Luxury upgrades or renovations
• Mortgage principal payments
• Household goods or appliances
• Expenses reimbursed by your employer (without adjustment)
• Costs related to vacation homes
• Expenses not directly related to housing (e.g., transportation)

To claim the Foreign Housing Exclusion, file IRS Form 2555 - Foreign Earned Income (2024) along with your annual tax return. Carefully track and document all housing-related expenses to ensure compliance. Consulting a tax professional familiar with expat taxes can also help you maximize this benefit.

It is strongly recommended that you use an expat tax professional to ensure that you minimize your taxes while ensuring that you meet all of your tax obligations.

Learn More About the Foreign Housing Exclusion or Deduction

• Form 2555 - Foreign Earned Income (2024).
• Instructions for Form 2555 (2024)
• About IRS form 2555
• Foreign Housing Exclusion or Deduction: Meaning and Limits on Investopedia.
• Find an Expat Tax Professional

Sources

• Foreign housing exclusion or deduction