How do I calculate the Foreign Housing Exclusion?

Calculating the Foreign Housing Exclusion involves several steps and location-specific limits. Here is a step-by-step guide to determining your housing exclusion amount.

Step 1: Total your qualifying housing expenses for the year. These include rent, utilities (gas, electric, water — but not telephone), renters insurance, residential parking, and furniture rental. Mortgage payments (principal and interest), domestic labor, home improvements, and purchased furniture do not qualify.

Step 2: Determine the base housing amount, which is 16% of the FEIE limit, prorated for the number of qualifying days. For 2024, the base amount for a full year is approximately $20,240 (16% x $126,500). This is the portion of housing costs the IRS considers normal and does not allow as an exclusion.

Step 3: Subtract the base housing amount from your total qualifying expenses. The result is your tentative housing exclusion.

Step 4: Apply the location-specific cap. The standard maximum housing expense is 30% of the FEIE limit (approximately $37,950 for 2024). However, the IRS publishes an annual list of high-cost locations with higher limits. For example, Hong Kong's limit may be approximately $114,300, London approximately $55,000, and Singapore approximately $57,000. If your expenses exceed the applicable limit, they are capped at that amount before subtracting the base.

Step 5: Ensure the housing exclusion does not exceed your foreign earned income minus the FEIE amount. The housing exclusion can only reduce income that is not already excluded by the FEIE.

A practical example: if you live in London and pay $4,000/month rent ($48,000/year) plus $3,600 in utilities, your qualifying expenses total $51,600. Subtract the base amount of $20,240 to get a housing exclusion of $31,360. Since London's cap is above this amount, you can exclude the full $31,360.

For self-employed individuals, this is claimed as a deduction rather than an exclusion, with an additional limitation that it cannot create or increase a net loss. Any unused housing deduction can be carried forward one year.