How to Claim the Foreign Housing Exclusion and Deduction

U.S. citizens and resident aliens living abroad may be eligible for a significant tax benefit known as the foreign housing exclusion or deduction. This provision is designed to offset the often higher cost of housing in a foreign country. It allows qualifying individuals to exclude or deduct a portion of their housing expenses from their gross income, thereby lowering their U.S. tax liability. The exclusion is for housing costs paid with employer-provided funds, while the deduction is for those paid with self-employment income.

Eligibility for the Housing Exclusion

To qualify for the foreign housing exclusion, a taxpayer must first satisfy the tax home test. This means your primary place of business, employment, or post of duty must be in a foreign country. It is the location where you are permanently or indefinitely engaged to work as an employee or self-employed individual. Having a “tax home” in a foreign country is the foundational requirement.

Beyond the tax home test, a taxpayer must meet one of two additional standards: the bona fide residence test or the physical presence test. The bona fide residence test requires that you are a resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, which runs from January 1 to December 31. This involves establishing deeper ties to the foreign country, and the IRS assesses factors like the nature of your work, your living quarters, and your integration into the foreign community.

Alternatively, taxpayers can qualify through the physical presence test. This test requires you to be physically present in a foreign country or countries for at least 330 full days during any consecutive 12-month period. A “full day” is a continuous 24-hour period starting at midnight. When counting the 330 days, you must not include days spent traveling to or from the U.S. or any days spent in the U.S. on vacation or for business. A taxpayer only needs to meet either the bona fide residence or the physical presence test, not both.

Identifying Qualified Housing Expenses

To calculate the exclusion, one must first identify all qualified housing expenses. These are the reasonable costs paid or incurred for housing in a foreign country for the taxpayer, their spouse, and any dependents who live with them. It is important to only consider expenses for the part of the year that you meet the eligibility tests.

Allowable expenses include:

• Rent paid for a property
• The fair rental value of housing provided by an employer if it’s included in your income
• The cost of necessary repairs
• Utilities, but this specifically excludes telephone, television, and internet services
• Payments for property insurance
• Fees required to secure a lease
• The rental of furniture and accessories
• Costs associated with residential parking

Certain costs are explicitly disallowed and cannot be included in your calculation. The IRS states that expenses are not qualified if they are “lavish or extravagant under the circumstances.” Disallowed costs include:

• The cost of purchasing property, such as mortgage principal payments
• Capital improvements that increase the property’s value
• The costs of domestic labor, like maids or gardeners
• The expense of purchased furniture

Calculating the Maximum Exclusion

The calculation of your foreign housing exclusion begins with your total qualified housing expenses for the year. From this total, you must subtract a “base housing amount.” This base amount is a threshold set by the IRS and represents a portion of housing costs that are not eligible for the exclusion. It is calculated as 16% of the maximum Foreign Earned Income Exclusion (FEIE) for that tax year, prorated for the number of days in your qualifying period. For the 2025 tax year, with the FEIE at $130,000, the annual base housing amount is $20,800, or $56.99 per day.

The result of subtracting the base housing amount from your total qualified expenses is your potential housing exclusion. For example, if your qualified expenses were $34,000 for 2025, you would subtract the $20,800 base amount, leaving a potential exclusion of $13,200. This figure, however, is subject to an overall limit.

This overall limit is 30% of the maximum FEIE for the year. For the 2025 tax year, this general limit is $39,000. The IRS recognizes that housing costs can vary significantly by location and provides an exception for designated high-cost localities. For these areas, the 30% limit may be adjusted upward. Taxpayers must consult the instructions for Form 2555 for the specific year to find the table of high-cost localities and their corresponding higher expense limits. Your final exclusion cannot exceed the lower of your calculated amount or this overall limit.

How to Claim the Housing Exclusion and Deduction

Once you have calculated your potential housing amount, you must use Form 2555, Foreign Earned Income, to claim the benefit on your U.S. tax return. This form is filed along with your Form 1040. The calculations for the housing exclusion are handled in Part VI of Form 2555. It is important to complete this part of the form before determining your foreign earned income exclusion, as the housing exclusion reduces the income eligible for the FEIE.

A distinction exists between the foreign housing exclusion and the foreign housing deduction. The exclusion is available to taxpayers whose housing is paid for with employer-provided amounts. These are funds your employer pays to you or on your behalf that are considered part of your taxable foreign earned income. If you are self-employed and pay for your housing from your self-employment earnings, you may be able to claim a foreign housing deduction instead.

The foreign housing deduction is claimed as an above-the-line deduction on Schedule 1 (Form 1040), which reduces your adjusted gross income. The amount of the deduction is also calculated using Form 2555. A taxpayer who is both an employee and self-employed during the year might claim both an exclusion and a deduction. Your total claimed housing exclusion and deduction cannot exceed your total foreign earned income for the tax year.