Foreign Housing Exclusion and Deduction for Expats
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
The foreign housing exclusion lets a U.S. citizen or green-card holder living abroad remove reasonable housing costs — above a base amount and up to a cap — from U.S. taxable income, in addition to the foreign earned income exclusion. Employees claim it as an exclusion; the self-employed claim the same costs as a deduction instead.
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Who qualifies for the housing exclusion?
Anyone who qualifies for the foreign earned income exclusion: a tax home abroad plus either bona fide residence in a foreign country or 330 full days of physical presence abroad in a 12-month period. Both benefits are claimed on Form 2555. You cannot claim the housing benefit without also qualifying for — and generally claiming — the earned income exclusion.
Which housing costs count?
Reasonable expenses actually paid for housing in a foreign country for you and your household: rent, utilities other than telephone and television, personal property insurance, repairs, furniture rental, and residential parking. Costs that do not count: mortgage principal and interest, property purchases, domestic help, lavish or extravagant expenses, and the cost of buying furniture. If you own your home abroad, only the qualifying running costs count, not the cost of the home itself.
How is the excludable amount calculated?
Three numbers, all tied to the year's foreign earned income exclusion limit:
- The base amount — 16% of the exclusion limit, prorated for the days you qualify. Housing costs up to the base are treated as what anyone would spend and get no benefit.
- The cap — generally 30% of the exclusion limit, prorated, but the IRS publishes higher caps every year for a long list of high-cost cities, from London and Paris to Tokyo, Hong Kong, Dubai, and Geneva.
- The excludable amount — your qualifying costs minus the base, limited by the cap.
The housing exclusion comes off income before the earned income exclusion is applied, and the combined benefit can never exceed your foreign earned income.
How do employees and the self-employed differ?
Employees take a housing exclusion: the amount comes straight off taxable income. Self-employed people take a housing deduction instead, limited to foreign earned income not already excluded, with any unused amount carried forward one year. If you have both wage and self-employment income abroad, the benefit is split between the two in proportion to the income.
Does employer-provided housing change anything?
If your employer pays for or reimburses your housing, that value is part of your foreign earned income — and the same costs then qualify for the housing exclusion. Employer-provided housing in a camp or remote site that meets specific conditions may instead be excluded under a separate rule, which is more generous.
What are the common mistakes?
- Forgetting the exclusion exists and claiming only the earned income exclusion.
- Counting mortgage payments, which never qualify.
- Using the standard cap when the city you live in has a higher published limit.
- Not prorating the base and cap for a partial qualifying year.
- Claiming housing costs for a second home or for family members who live elsewhere.
Frequently asked questions
Does the housing exclusion reduce self-employment tax?
No. Like the earned income exclusion, it reduces income tax only.
My spouse and I both work abroad. Can we each claim it?
You share one set of housing costs. If you live together, the costs are claimed by one spouse or allocated between you; separate households abroad can each qualify separately.
Do I need receipts?
Yes — a lease and proof of payment for rent, and records for utilities and other qualifying costs. Estimates are not acceptable.
Is the housing exclusion added back for modified adjusted gross income?
Yes, wherever the earned income exclusion is. Both reduce taxable income but count again for limits such as Roth IRA eligibility and the net investment income tax threshold.
Next step
Fairlight Accounting handles U.S. domestic, cross-border (U.S.–Canada), and international tax returns, plus bookkeeping, payroll, and CFO advisory. If you rent abroad and haven't claimed the housing exclusion — or aren't sure your city's cap was applied — our U.S. Tax Desk can review your Form 2555. See pricing or book a free fit call.
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