Living abroad as a U.S. expat comes with unique financial benefits, one of which is the Foreign Housing Exclusion. This exclusion helps reduce your tax liability by allowing you to exclude certain housing costs from your total foreign earned income. Understanding the base housing amount, maximum foreign earned income, and reasonable expenses will help you maximize your tax savings.
This guide will provide a clear and concise overview of how to claim these benefits effectively.
Key Takeaways
- You must file Form 2555 to claim the Foreign Housing Exclusion on your U.S. tax return.
- Qualified housing expenses (exclusion) include rent, utilities (except telephone), property insurance, small repairs, and parking fees.
- To use the exclusion or deduction, your qualified housing expenses must exceed the base housing amount, which is 16% of the FEIE for the year.
- The maximum you can exclude or deduct for housing is typically 30% of the FEIE (unless a higher high‑cost locality limit applies).
- Self‑employed? Use the Foreign Housing Deduction instead.
What is the Foreign Housing Exclusion?
The foreign housing exclusion allows you to exclude a portion of your foreign housing expenses from your taxable income, up to a maximum amount that varies by location. These foreign housing costs are part of the exclusion and can help offset certain living expenses incurred from moving abroad.
The foreign housing exclusion applies only to housing expenses paid with taxable foreign earned income from employment.
If you are self‑employed, you may qualify for the foreign housing deduction instead, which applies to amounts paid with self‑employment earnings and is used to reduce self‑employment income.
How do you qualify for Foreign Housing Exclusion?
To qualify for the foreign housing exclusion, you must first qualify for the Foreign Earned Income Exclusion (FEIE) by passing either the bona fide residence test or the physical presence test.
- Bona fide residence test: Be a resident of a foreign country for an uninterrupted calendar year (January 1–December 31).
- Physical presence test: Be physically present in a foreign country for at least 330 full days during any period of 12 consecutive months.
In addition to qualifying for the FEIE, your qualified housing expenses must exceed 16% of the FEIE (the base housing amount) for the year in order to use the foreign housing exclusion or deduction.
2025 Key Numbers
- FEIE (2025): $130,000
- Base Housing Amount (16% of FEIE): $20,800 annually ($56.99/day)
- General Housing Expense Limit (30% of FEIE): $39,000 annually ($106.85/day)
- High‑Cost Localities: Certain cities have higher limits (see Notice 2025‑16). Examples: Hong Kong $114,300; Geneva $102,600; Tokyo $67,700; London $67,000; Singapore $82,900; Mexico City $47,900.
What Counts as Housing Expenses?
Qualified housing expenses (exclusion) include:
- Rent
- Utilities (except telephone charges)
- Property insurance
- Fees for securing a lease
- Rental of furniture
- Repairs and residential parking
- These qualified housing expenses can be incurred for the taxpayer, spouse, and dependents.
Qualified housing expenses (deduction for the self‑employed) include rent, utilities, and repairs (same “reasonable and necessary” standard).
What Doesn’t Count?
You cannot include:
- Lavish or extravagant expenses
- Mortgage interest or property taxes
- The cost of buying property
- Domestic labor (maids, gardeners)
- Improvements that increase property value
How to Calculate the Foreign Housing Exclusion
- Total Housing Expenses
Add up all your eligible housing costs for the year while you were living in a foreign country. These qualified housing expenses are those that are reasonable and necessary for living abroad. - Subtract the Base Housing Amount
The base housing amount is 16% of the FEIE.
For 2025, FEIE is $130,000, so the base housing amount is $20,800 annually ($56.99/day). - Apply the Limitation
- General limit: 30% of the FEIE → $39,000 for 2025 ($106.85/day).
- High‑cost locality limit: If your city is listed in Notice 2025‑16, you can use the higher city‑specific cap instead of $39,000.
Example (Standard Location):
Total housing expenses = $34,000
Housing amount = $34,000 − $20,800 = $13,200 → eligible for exclusion (under the $39,000 general limit).
Example (High‑Cost Locality):
You live in London with $70,000 in qualified expenses.
Housing amount = $70,000 − $20,800 = $49,200.
London’s limit is $67,000, so you can exclude the full $49,200 (subject to overall foreign earned income).
Important: Under §911, your housing exclusion/deduction cannot exceed your foreign earned income for the applicable period.
How to Claim the Foreign Housing Exclusion?
To claim the Foreign Housing Exclusion, you must file Form 2555 with your U.S. tax return. On this form, you’ll detail your foreign earned income, qualified housing expenses, and residency status (to show you meet either the physical presence test or the bona fide residence test).
It’s crucial to calculate and claim the housing exclusion before the foreign earned income exclusion on the same form. This is because the IRS subtracts your housing exclusion from your foreign earned income first, then applies the FEIE to whatever income remains.
By doing it in this order:
- Your housing exclusion is never wasted — even if your FEIE is large enough to exclude most of your income.
- You can still use the full FEIE amount (up to $130,000 for 2025) on the remaining income after the housing exclusion is applied.
Example:
- Foreign earned income: $150,000
- Housing exclusion: $20,000
- Remaining income: $130,000 → fully covered by the FEIE → $0 taxable foreign income.
If you reversed the order, the FEIE would exclude $130,000 first, leaving only $20,000 in income — and you’d have no income left to apply the housing exclusion to, meaning you’d lose that $20,000 in potential tax savings.
This sequencing rule makes a big difference for expats with high housing costs and income above the FEIE limit, ensuring you maximize your total exclusions.
Special Considerations
- Married couples can maximize benefits if both spouses qualify, as each can claim the exclusion, potentially increasing the total benefit.
- Self‑employed individuals use the Foreign Housing Deduction to reduce self‑employment income (not the exclusion). The maximum Foreign Housing Deduction is typically 30% of the FEIE, subject to the same base and locality rules. In practice, unused housing deductions may be carried forward one year (subject to §911 limitations and coordination with FEIE).
- Foreign Tax Credit or Deduction: Once you exclude foreign housing amounts, you cannot take a foreign tax credit or deduction for taxes on the excluded income.
- Additional Child Tax Credit: If you claim the FEIE or housing exclusion, you may lose eligibility for the additional child tax credit if you do not have earned income reported.
The Foreign Housing Exclusion is one of the most effective tools U.S. expats can use to reduce taxable income. By understanding the rules, knowing your city’s limit, and calculating correctly, you can legally minimize your U.S. tax bill while living abroad.
At 1040 Abroad, our team of Enrolled Agents can guide you through claiming the Foreign Housing Exclusion, the FEIE, and other expat tax benefits. Contact us today to ensure you are fully compliant while maximizing your savings.
