What is Foreign Housing Exclusion?

Definition

The Foreign Housing Exclusion (FHE) allows US citizens and resident aliens working abroad as employees to exclude from their gross income the portion of employer-provided housing amounts that exceeds a base housing amount. It is claimed on Form 2555, Part VI, in conjunction with the Foreign Earned Income Exclusion (FEIE), and provides additional tax savings beyond the FEIE's $133,250 exclusion limit for 2026. Base Amount and Maximum: The base housing amount is calculated as 16% of the FEIE limit, prorated for the number of qualifying days in the tax year. For 2026, this is 16% x $133,250 = $21,320 (for a full year). The standard maximum housing amount is 30% of the FEIE limit: 30% x $133,250 = $39,975 for 2026. Your excludable housing cost amount is the lesser of your actual qualifying housing expenses or the applicable maximum, minus the base amount. So for 2026, the maximum standard exclusion is $39,975 - $21,320 = $18,655. High-Cost City Adjustments: The IRS publishes annual location-specific limits for cities where housing costs significantly exceed the standard maximum. Cities like Toronto, Vancouver, London, Hong Kong, Tokyo, and Singapore have elevated maximums that can substantially increase the exclusion. For example, if the IRS sets the Toronto limit at $50,000, your maximum excludable amount becomes $50,000 - $21,320 = $28,680. The IRS Notice listing these adjusted amounts is typically published in the spring for the prior tax year. Always check the current year's notice, as limits change annually. Qualifying Housing Expenses: Reasonable expenses that qualify for the housing exclusion include: rent for your dwelling, utilities (electricity, gas, water, heating, but NOT telephone/internet), personal property insurance (renters insurance), residential parking, furniture rental (not purchases), and occupancy taxes not deductible under Section 164. For US citizens renting in Canadian cities like Toronto or Vancouver, rent and utilities typically constitute the largest qualifying expenses. Non-Qualifying Expenses: The following do NOT qualify for the housing exclusion: mortgage payments or home purchase costs, furniture purchases, domestic help or maid service, home improvements or renovations, telephone and internet charges, pay television (cable/streaming), purchased appliances, and any expenses that are 'lavish or extravagant under the circumstances.' The mortgage exclusion is a common trap for US expats who own their foreign residence — you cannot exclude mortgage interest and principal through this provision (though mortgage interest may still be deductible as an itemized deduction). Exclusion vs. Deduction: The Foreign Housing Exclusion is available only to employees. If you are self-employed abroad, you claim the Foreign Housing Deduction instead, which has the same qualifying expenses and limits but is taken as an above-the-line deduction on Form 1040 rather than an exclusion. The deduction can only offset foreign earned income and cannot create or increase a net operating loss. Some individuals who are both employed and self-employed abroad may use a combination of the exclusion and deduction. Form 2555 Part VI: You calculate the housing exclusion on Part VI of Form 2555. This section requires your total qualifying housing expenses, the applicable housing amount limit for your location, the base housing amount, and the resulting exclusion. If your qualifying period does not cover the entire year (e.g., you moved abroad mid-year), both the base amount and the maximum are prorated based on the number of qualifying days. Interaction with the FEIE: The housing exclusion amount reduces the amount of income available for the FEIE. Specifically, your FEIE is limited to your foreign earned income minus your housing exclusion amount. However, the combined benefit of the FEIE plus the housing exclusion typically exceeds the FEIE alone, making the housing exclusion a valuable additional benefit. Cross-Border Planning: For US citizens employed in high-cost Canadian cities, the housing exclusion can provide significant additional tax savings. A US citizen renting a $3,000/month apartment in Toronto with $300/month in qualifying utilities would have $39,600 in annual qualifying expenses. After subtracting the $21,320 base amount, the excludable amount is $18,280 — representing additional income shielded from US taxation beyond the FEIE. If the IRS has set an elevated limit for Toronto, the exclusion could be even higher.

Related Forms

Common Mistakes to Avoid

• 1Including mortgage payments or home purchase costs as qualifying housing expenses — only rent and rental-related costs qualify
• 2Not checking the IRS annual notice for high-cost city adjustments that could increase your exclusion above the standard 30% maximum
• 3Confusing the housing exclusion (for employees) with the housing deduction (for self-employed) — they have the same qualifying expenses but different mechanics

Related Terms