Foreign Housing Exclusion Or Deduction – 10 Expat Tax Questions Answered

Living abroad often means higher rent, insurance, and utility costs than in the United States. To help offset those expenses, the IRS lets qualified Americans exclude or deduct certain foreign housing costs through the Foreign Housing Exclusion or Deduction.

If you are new to expat taxes, check out our Guide for Expats.

1. What is the Foreign Housing Exclusion or Deduction?

The Foreign Housing Exclusion or Deduction lets Americans living abroad reduce their taxable income by excluding or deducting qualified housing expenses incurred in a foreign country.

It’s claimed on Form 2555, the same form used for the Foreign Earned Income Exclusion (FEIE).

The amount you can claim changes annually based on inflation and the cost of living where you reside. The IRS sets both a base housing amount and a maximum limit, which vary depending on your location.

In simple terms, this provision helps align US taxation with the reality that housing abroad can be much more expensive than in the US.

To claim this benefit, you must have foreign earned income, a tax home in a foreign country, and meet either the bona fide residence or physical presence test under the FEIE rules. Your combined FEIE and housing exclusion or deduction cannot exceed your total foreign earned income.

2. Who can claim the Foreign Housing Exclusion or Deduction?

Expats must meet the following four requirements to qualify for the Foreign Housing Exclusion:

• Claim the Foreign Earned Income Exclusion (FEIE)
• Establish your tax home in a foreign country
• Pass the physical presence or bona fide residence test
• Have eligible foreign housing expenses that exceed the minimum threshold

Your tax home is where you regularly work, not necessarily where your family resides. The tests (Physical Presence or Bona Fide Residence) confirm that you live abroad long enough to qualify for the FEIE and related benefits.

You cannot claim the housing exclusion or deduction unless you qualify for the FEIE. Both benefits work together under Section 911 to reduce the US tax on foreign earned income.

3. How much can I exclude?

The housing exclusion only applies to qualified expenses that exceed a base amount, also known as the minimum housing threshold.
This threshold is tied to the FEIE and adjusts each year for inflation.

The base amount equals 16% of the annual FEIE limit. Only expenses above that 16% threshold qualify for exclusion or deduction.

For 2025, the FEIE limit is $130,000, which means the base housing amount is $20,800 (16% × $130,000). Only housing expenses above that amount can be excluded.

If you qualify for the FEIE for part of the year, the base housing amount must be prorated accordingly.

There’s also a ceiling, the maximum you can claim, based on your city’s cost-of-living cap. Each year, the IRS publishes a table of locations with higher allowable limits for cities where housing costs are significantly above average. Always check the latest IRS notice for updated figures.

4.  How high is the maximum Foreign Housing Exclusion?

The standard maximum for the Foreign Housing Exclusion or Deduction is 30% of the Foreign Earned Income Exclusion (FEIE).

With the 2025 FEIE limit of $130,000, the standard maximum housing exclusion is $39,000 (30% × $130,000). However, many cities around the world have higher limits due to higher living costs. Each year, the IRS publishes a list of cities with approved higher caps for the Foreign Housing Exclusion or Deduction.

These extended limits apply in high-cost locations such as London, Singapore, Hong Kong, Zurich, Amsterdam, Munich, and Tokyo, among others.

If you live in one of these cities, you can exclude significantly more of your housing expenses than the standard amount.

You can find the current city-specific limits in the IRS notice titled “Housing Expense Limitation”, published annually.

Remember that the maximum applies per qualifying person. Married couples who both qualify under the FEIE and maintain separate tax homes can each claim their own limit.

5. What expenses are eligible for the Foreign Housing Exclusion or Deduction?

Reasonable expenses that you paid for or incurred for housing in a foreign country qualify for the exclusion/deduction. Future or expected cost, however, do not qualify. Neither do “lavish” expenses (examples below).

Furthermore, you can only claim housing expenses for the part of the year that you qualify for the Foreign Earned Income Exclusion.

Reasonable housing expenses include:

• Rent
• Fees for securing a lease
• Property insurance
• Parking spaces
• Rentals for furniture or appliances
• Certain utilities such as water and gas
• Home repairs (not capital improvements) 

Expats can pay for eligible housing expenses through salary, employer reimbursements, or third-party payments on their behalf.

6. Which housing expenses cannot be excluded or deducted?

Housing expenses that are considered lavish or extravagant are not eligible.

Additional expenses that don’t qualify are:

• Cost of buying a property
• Domestic labor (cleaning, cooking)
• Television
• Phone bills
• Purchased furniture
• Improvements to a property.

If you are unsure of whether an expense qualifies, you should contact a tax professional to verify.

7. What is the difference between the exclusion and deduction?

Whether you claim a Foreign Housing Exclusion or Foreign Housing Deduction depends on your employment type.

Employees use the Foreign Housing Exclusion, which reduces taxable income on employer-provided amounts that are included in foreign earned income.

Self-employed individuals use the Foreign Housing Deduction, which lowers adjusted gross income but does not reduce self-employment tax.

If you have both wages and self-employment income, you may use both rules for the appropriate portions.

The Foreign Housing Exclusion for employees

Employees who are taking the exclusion do not need to pay taxes on the income that went towards the housing expenses.

There are a few ways that employers typically pay for or provide housing for expats.

• If the employer includes funds for housing in the employee’s gross income, then the employee can claim the Foreign Housing Exclusion.
• A company can include the funds designated for housing or as a part of the employee’s regular salary. Either way is acceptable.
• Housing already excluded under Section 119 (for lodging furnished for the employer’s convenience) cannot also be used for the Foreign Housing Exclusion. Only taxable employer-provided housing or allowances qualify.

The Foreign Housing Deduction for self-employed individuals

Self-employed individuals receive a deduction, which helps reduce their overall income tax liability. However, this deduction does not reduce self-employment tax.

If you are self-employed and work from a home office you cannot use the same funds for the Foreign Housing Deduction and the Home Office Deduction. An experienced accountant can analyze whether it would be better to take the foreign housing deduction, home office deduction, or even setting up an accountable expense plan to reimburse home office expenses.

There is a benefit for self-employed expats though. They can carry forward excess expenses and apply them to the next tax year. This carryover is not available for employees.

8. How to calculate the Foreign Housing Exclusion or Deduction?

 Calculating the Foreign Housing Exclusion or Deduction involves several steps. Here’s the general process:

1. Add up all eligible housing expenses (see Section 6).
2. Subtract the base housing amount (16% of the FEIE limit).
3. Check the maximum limit for your city from the annual IRS notice.

Claim the lesser of:

• • Your total qualified expenses minus the base amount, or
  • The city-specific maximum amount.

If your total housing expenses do not exceed the minimum threshold, you cannot claim the exclusion or deduction.

Moving during the tax year

If you move between countries, or between two homes abroad, calculate your housing costs separately for each location.

You must prorate both the minimum threshold and the maximum cap based on the number of days spent in each place.

If you move from the United States to a foreign country midyear, you can claim the exclusion or deduction only for the portion of the year you lived abroad and met the FEIE requirements.

9. How can spouses claim the exclusion?

Married expats often face unique situations when it comes to housing, especially if they live in different countries or maintain separate homes.

One Foreign Housing Exclusion for spouses who share a home

If a couple lives abroad in the same home, they can aggregate their total qualified housing expenses and let either spouse claim the exclusion, or allocate them proportionally between returns if filing separately, but they cannot double-count the same expenses.

If they spend different lengths of time abroad, expenses must be prorated for the shorter qualifying period.

Spouses who maintain separate homes can each claim the exclusion

Many expat spouses live in different cities or even countries. This can occur for a variety of reasons. Some couples live in different locations for their jobs or children’s schooling. Other couples choose to maintain separate homes because one spouse lives and works in a dangerous location.

Spouses who maintain separate homes abroad can often claim the Foreign Housing Exclusion or Deduction separately, on their own returns. To be eligible for this, their homes cannot be within reasonable commuting distance nor in the same tax home.

10. Which tax form to use to deduct foreign housing costs?

The Foreign Housing Exclusion or Deduction is claimed on the same tax form as the Foreign Earned Income Exclusion, Form 2555.

The filing deadline for expats is generally June 15 (with an automatic two-month extension). Any tax due must still be paid by April 15 to avoid interest, though penalties are waived until June 15.

For the current year, standard deadlines and extension rules apply.
If you need more time to file, you can request an additional extension to October 15 using Form 4868.

Common Questions About the Foreign Housing Exclusion

Who qualifies for the housing exclusion or deduction?

You must qualify for the FEIE first, have a foreign tax home, meet the bona fide residence or physical presence test, and incur eligible housing expenses abroad.

What expenses count toward the housing benefit?

Qualified expenses include rent, utilities, insurance, furniture rental, parking if required, and reasonable repairs, when incurred for a foreign residence you occupy.

How much housing cost can I exclude or deduct?

You can exclude or deduct the expenses exceeding the base housing amount (roughly 16 % of FEIE) up to your location’s cap (often ~30 % of FEIE, higher in costly cities).

How does the exclusion differ from the deduction?

Employees use the housing exclusion (reduces taxable income via Form 2555) while self-employed individuals use the housing deduction (reduces adjusted gross income) and the rules differ for Social Security/Medicare.

What happens if I move mid-year or live in two foreign homes?

You must separate housing costs for each location, prorate based on days in each location and apply the relevant cap for each home.

Can I still claim the housing benefit if my employer pays my housing?

Yes, if your employer includes the housing cost in your gross income or you pay the cost yourself you may claim the exclusion or deduction, but how it’s treated depends on employer arrangements.

Need help with your US Taxes?

The Foreign Housing Exclusion or Deduction can result in huge tax savings when living abroad. Still, we see many Americans abroad overlooking this tax savings opportunity. Others don’t calculate it correctly because the pro-rating can be complicated.

Understanding how it interacts with the FEIE, and keeping detailed records of your housing expenses, ensures you maximize your available tax relief.

These 10 Questions about the housing exclusion hopefully gave you a good overview. Of course, no blog post or internet article can replace the advice of a tax professional who knows your specific tax situation.

If you have additional questions and want help to prepare your tax return, schedule a consultation with one of our expat tax accountants.