What is the Foreign Housing Exclusion?

The Foreign Housing Exclusion (or Foreign Housing Deduction for self-employed individuals) allows qualifying US expats to exclude or deduct certain housing expenses that exceed a base amount from their US taxable income. This is an additional benefit on top of the Foreign Earned Income Exclusion and is claimed on the same Form 2555.

To qualify, you must meet the same requirements as for the FEIE — you need a foreign tax home and must pass either the Physical Presence Test or the Bona Fide Residence Test. The housing exclusion/deduction is available regardless of whether you also claim the FEIE.

Qualifying housing expenses include: rent, utilities (excluding telephone), real and personal property insurance, residential parking, furniture rental, and temporary living expenses (for the first 90 days in a new location). Non-qualifying expenses include: purchased furniture, mortgage principal payments, domestic labor (maids, gardeners), home improvements, and deductible interest and taxes.

The calculation works as follows: you take your total qualifying housing expenses for the year and subtract the base housing amount, which is 16% of the FEIE limit (approximately $20,240 for 2024). The difference is your housing exclusion. However, there is a maximum housing exclusion that varies by location — the IRS publishes a list of high-cost cities with higher limits (such as Hong Kong, Tokyo, London, and Zurich).

For employees, the excess housing amount is an exclusion that reduces your gross income. For self-employed individuals, it is a deduction that can only reduce foreign earned income — it cannot create or increase a loss. Any unused housing deduction can be carried forward to the next year.

The Foreign Housing Exclusion is frequently overlooked by expats and their tax preparers, but it can provide significant additional savings, especially for those living in high-cost cities. In places like Hong Kong or Singapore, the housing exclusion can add $30,000 or more in additional excluded income.