Impact of Foreign Housing Exclusion on U.S. Taxes

If you're an American living abroad, we assume you must have thought about taking a tax class to navigate the great American tax system. While your stateside friends debate whether their side hustle earnings are taxable, you're wrestling with questions that sound like they belong in an international law textbook.

Here's one that might sound familiar, you're probably paying what feels like a small fortune for that apartment in London, that flat in Singapore, or that studio in Zurich, and you can't help wondering if the IRS understands that overseas rent costs more than your entire hometown salary used to be, right?

Actually, they do. The Foreign Housing Exclusion is a tax benefit that's practically designed for expats dealing with eye-watering international housing costs. This often-overlooked provision can slash thousands from your U.S. tax bill, but like most valuable tax strategies, it comes with rules, calculations, and paperwork that can make your head spin.

Once you understand how it works, the Foreign Housing Exclusion becomes one of the most straightforward ways to keep more of your hard-earned money in your pocket instead of sending it back to the Treasury. Let's break down everything you need to know to claim this benefit correctly and maximize your tax savings while living abroad.

What Is the Foreign Housing Exclusion?

The Foreign Housing Exclusion is essentially the IRS acknowledging that living abroad can be expensive, sometimes ridiculously so. It allows qualified U.S. citizens and residents working overseas to exclude certain housing expenses from their taxable income, beyond what the Foreign Earned Income Exclusion (FEIE) already covers. Think of it as the government's way of saying, "We understand that rent in Tokyo or Zurich might cost more than your entire salary would have been in Topeka, and we're willing to cut you some slack."

While the FEIE lets you exclude up to $130,000 of foreign earnings in 2025 (the amount adjusts annually for inflation), the housing exclusion is a separate benefit on top of that. It specifically targets the high cost of keeping a roof over your head in foreign countries.

The really beautiful part? This isn't a deduction that merely reduces your taxable income—it's an exclusion that completely removes qualifying housing expenses from the IRS's calculation of what you owe, potentially saving you thousands of dollars depending on where you live.

Who Qualifies for the Foreign Housing Exclusion?

Before you start calculating how much you can exclude, let's make sure you actually qualify. The eligibility requirements mirror those for the Foreign Earned Income Exclusion:

You must be a U.S. citizen or resident alien who is either:

A bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year (January 1 to December 31 for most people)
Physically present in a foreign country for at least 330 full days during any consecutive 12-month period (the "Physical Presence Test")

Additionally, your tax home must be in a foreign country, and you must have foreign earned income—meaning income received for services performed in a foreign country.

What trips people up most often? The "tax home" concept. Your tax home isn't necessarily where you file taxes—it's your main place of business or employment. If your job is indefinitely or permanently located abroad, your tax home is abroad. But if you're just on a temporary assignment (generally less than one year), your tax home might still be in the U.S., making you ineligible for the exclusion.

Self-employed individuals can qualify too, but there's a twist: you'll claim the Foreign Housing Deduction rather than the Exclusion (more on that key difference later).

Which Expenses Are Eligible?

This is where things get interesting—and potentially lucrative. The IRS allows a surprisingly generous list of housing-related expenses to be included in your exclusion calculation:

Definitely included:

Rent for your overseas residence
Utilities (except for telephone bills)
Real and personal property insurance
Rental of furniture and accessories
Repairs and maintenance of your residence and its contents
Parking fees for your residence
Required residential fees (like homeowners' association dues)

Definitely NOT included:

Mortgage payments or purchased property costs
Domestic help expenses (sorry, that housekeeper doesn't count)
Television streaming services or cable subscriptions
Home improvements that increase property value
Purchased furniture or appliances
Any housing expenses that seem "lavish or extravagant"

The gray area? Internet service. While the IRS doesn't explicitly list it, most tax professionals consider it part of utilities if it's necessary for your work or reasonable for personal use.

My advice? Keep meticulous records of every housing expense throughout the year, with receipts whenever possible. The last thing you want is to underestimate what you could have claimed—or worse, claim something you can't substantiate during an audit.

How to Calculate Your Foreign Housing Exclusion

Calculating your Foreign Housing Exclusion involves a four-step process that, while not exactly rocket science, does require some attention to detail:

Determine your total qualified housing expenses for the year. Add up all eligible housing expenses you paid during the tax year. For 2025, let's say your qualifying housing expenses total $35,000.
Calculate your base housing amount. The IRS establishes a floor for housing expenses, below which you get no exclusion. This "base housing amount" equals 16% of the FEIE limit for the year, prorated for the number of days you qualify.

For 2025, with an FEIE limit of $130,000:

Base housing amount = $130,000 × 16% = $20,800 (for a full year)
If you qualify for only 300 days: $20,800 × (300 ÷ 365) = $17,151

Determine your maximum housing amount. The IRS caps how much you can exclude based on where you live. For most locations, the maximum is 30% of the FEIE limit (about $39,000 for 2025), but for high-cost cities, it can be significantly higher.

For example, if you live in:

Hong Kong: The limit is $114,300
Paris: The limit is $74,400
Sydney: The limit is $63,500

The IRS publishes these location-specific limits annually. You can find the current limits in the instructions for Form 2555.

Calculate your allowable housing exclusion. Subtract your base amount from your actual housing expenses: $35,000 (actual expenses) − $20,800 (base amount) = $14,200. Then ensure this amount doesn't exceed your location's maximum: If your location's maximum is $39,000, your exclusion is $14,200. If your location's maximum is only $12,000, your exclusion would be limited to $12,000.

Real-world example: Sarah lives in Singapore and paid $48,000 in qualified housing expenses in 2025. The maximum housing amount for Singapore is $82,000.

Her exclusion calculation:

Actual expenses: $48,000
Base amount: $20,800
Potential exclusion: $27,200
Location maximum: $82,000
Final exclusion amount: $27,200

That's $27,200 in income Sarah won't have to pay taxes on—beyond her FEIE!

How to Claim the Exclusion Using Form 2555

Now for the paperwork—you'll need to file Form 2555 with your annual tax return. This is the same form used for the Foreign Earned Income Exclusion, but with additional sections for housing expenses.

Here's a step-by-step guide to completing the housing sections:

Complete Parts I through III of Form 2555 as you normally would for the FEIE, establishing your foreign residence and qualifying period.
Fill out Part VI (Foreign Housing Exclusion) with your qualifying housing expenses, grouped by category.
Complete the calculation in Part IX to determine your allowable housing exclusion.
Carry the final amount to Line 36 of Form 2555, which will flow to your Form 1040.

A few critical tips from someone who's been there:

Don't leave any lines blank—use zeroes where appropriate.
Double-check your math, especially when prorating for partial years.
Include any supporting documentation with your return.
If using tax software, verify that it correctly calculates your location-specific maximum. While tax software has improved in handling these calculations, many programs still struggle with the location-specific housing limits. When in doubt, manually verify the software's calculations against the IRS tables.

Foreign Housing Deduction vs. Exclusion

This is where terminology matters, and getting it wrong could cost you. The Foreign Housing Exclusion and the Foreign Housing Deduction are similar benefits with one crucial difference: who can claim them.

Foreign Housing Exclusion:

Available to employees (including self-employed people who are also employed by others)
Reduces your foreign earned income before calculating taxes
Claimed by entering amounts on Form 2555, Part VI

Foreign Housing Deduction:

Available to self-employed individuals
Operates as an adjustment to income on your tax return
Limited to your foreign earned income after the FEIE
Claimed on Form 2555, Part IX

If you're both employed and self-employed, you might be eligible for both in the same tax year. The calculation gets a bit more complex, as you'll need to allocate your housing expenses between your employment and self-employment income.

The difference in impact can be significant. For example, the exclusion directly reduces income subject to both income tax and self-employment tax, while the deduction typically only reduces income tax. For self-employed taxpayers facing the 15.3% self-employment tax, this distinction matters a lot!

Common Mistakes to Avoid When Claiming the Exclusion

In my years helping expats with their taxes, I've seen these same mistakes trip people up time and again:

Claiming ineligible expenses: That fancy new refrigerator you bought might seem like a housing expense, but purchased appliances don't qualify. Stick to the IRS-approved list.
Forgetting to prorate: If you qualify for only part of the year, you must prorate both your expenses and your base amount accordingly.
Overlooking location-specific limits: Housing limits vary dramatically by location. Using the standard limit when your city has a higher one means leaving money on the table.
Double-dipping with housing benefits: If your employer provides a housing allowance that's excluded from your income, you can't also claim those same expenses for the housing exclusion.
Missing the foreign currency conversion: All amounts must be reported in U.S. dollars. Use the yearly average exchange rate for expenses that occur throughout the year.
Not coordinating with the FEIE: Your combined Foreign Earned Income Exclusion and Housing Exclusion can't exceed your total foreign earned income. Plan accordingly!
Neglecting state tax implications: Some states don't recognize the federal foreign income and housing exclusions. Check your state's rules to avoid unexpected state tax bills.

The most costly mistake of all? Not claiming the exclusion when you qualify.

Conclusion

The Foreign Housing Exclusion isn't just another tax form to fill out—it's potentially one of the most valuable tax benefits available to Americans living abroad. By understanding its rules and limitations, you can significantly reduce your U.S. tax liability while maintaining compliance with all IRS requirements.

Whether you're just beginning your overseas adventure or you've been living abroad for years, taking full advantage of the Foreign Housing Exclusion could mean the difference between writing a check to the IRS or getting a refund. And in high-cost locations, the savings can amount to thousands of dollars annually.

Have questions about how the Foreign Housing Exclusion works with your specific situation? We at NSKT Global specialize in expat taxation and can help you navigate the complexities of claiming every tax benefit you're entitled to while living abroad. From determining which expenses qualify to handling the paperwork correctly, we'll ensure you're maximizing your tax savings while staying fully compliant with both U.S. and local tax laws.

FAQs About the Foreign Housing Exclusion

What's the maximum housing exclusion amount?

The maximum amount varies by location. For 2025, the standard maximum is approximately $39,000 (30% of the FEIE limit), but high-cost cities have much higher limits—up to $114,300 for places like Hong Kong. Check the IRS's annual published limits for your specific location.

Can I use the exclusion without the Foreign Earned Income Exclusion?

Yes, technically you can. However, you must still meet the same qualification tests (Bona Fide Residence or Physical Presence). Since these are the same requirements for the FEIE, it rarely makes sense to claim the housing exclusion without also claiming the FEIE.

Are moving costs included in the housing exclusion?

No, moving expenses don't qualify as housing expenses for the Foreign Housing Exclusion. However, certain moving expenses related to foreign employment might qualify as a separate adjustment to income if you meet specific requirements.

What if my housing costs change during the year?

Simply report your actual eligible housing expenses for the qualifying period. If you moved from a low-cost to a high-cost location during the year, you can use the higher limit prorated for the time you lived there.

Can I claim both the foreign housing exclusion and the standard deduction?

Absolutely! The Foreign Housing Exclusion is an exclusion from income, not an itemized deduction. This means you can claim both the housing exclusion and your standard deduction (or itemized deductions if they're higher) in the same tax year.