Foreign Housing Exclusion: How US Expats Can Reduce Tax on Housing Costs Abroad
In this guide
What is the foreign housing exclusion? It is a US tax break for expats who pay housing costs abroad. The IRS says your tax home must be in a foreign country and you must meet either the bona fide residence test or the physical presence test. The exclusion covers housing paid for with employer-provided amounts, and the deduction covers housing paid for with self-employment earnings.
Quick answer
- Employee paid by an employer: the housing exclusion. Self-employed: the housing deduction.
- You generally cannot claim both unless you were both self-employed and an employee during the year.
- The amount is your housing expenses minus a base housing amount.
- It is figured on Form 2555, Parts VI, VIII and IX.
- If you claim it, you generally cannot also take a foreign tax credit or deduction for tax on that excluded income.
Which housing costs count?
| Counts | Does not count |
|---|---|
| Reasonable housing expenses you actually paid or incurred in a foreign country | Expenses that are lavish or extravagant under the circumstances |
| Expenses for your spouse and dependents if they lived with you | Buying property, purchased furniture or accessories, and improvements that increase value or extend property life |
| Only the part of the year you qualify for the foreign earned income exclusion | The value of meals, and employer-provided lodging not included in your gross income |
How do the limits work?
- Foreign housing amount. Housing expenses minus a base housing amount. The base amount is 16% of the maximum foreign earned income exclusion, prorated by the number of qualifying days in the tax year.
- Expense cap. It varies by location and is computed using a worksheet in the Form 2555 instructions.
- Income cap. Housing expenses cannot exceed your total foreign earned income for the year.
- Deduction cap. The deduction cannot exceed foreign earned income minus the foreign earned income exclusion and any housing exclusion.
The IRS also says the housing exclusion is figured before the foreign earned income exclusion, and you cannot claim less than the full housing exclusion you are entitled to.
Does it reduce self-employment tax?
No. The IRS says the exclusion or deduction reduces regular income tax but not self-employment tax.
How does it interact with the foreign tax credit?
Once you exclude housing amounts, you generally cannot take a foreign tax credit or deduction for taxes on that excluded income. Doing so may revoke your housing exclusion choice. Read our guide to the foreign tax credit and Form 1116 before you decide which route suits you.
Common mistakes
- Counting the purchase price of a home. Buying property does not count.
- Claiming both the exclusion and the deduction when you were not both employed and self-employed.
- Forgetting to prorate for the days you qualify.
- Claiming the foreign tax credit on excluded income. It may revoke your choice.
FAQ
Do I need to qualify for the foreign earned income exclusion first?
You need to meet the bona fide residence or physical presence test. Our guide to the foreign earned income exclusion explains both.
Where do I find the exact expense cap for my city?
The IRS says it varies by location and is computed using a worksheet in the Form 2555 instructions.
Which form do I use?
Form 2555. See also Publication 54, chapter 4.
Key takeaways
- Employees use the exclusion; the self-employed use the deduction.
- Reasonable rent counts; buying property does not.
- The amount is expenses minus a base amount, subject to location and income caps.
Related guides
- Moving abroad checklist
- Your first 90 days in a new country
- Foreign earned income exclusion explained
- Expat tax for US citizens abroad
- Expat tax extension dates
Last updated: October 2026. This guide is general information, not tax advice. Rules and limits change, so check the IRS or a qualified tax adviser.
Sources
- IRS: Foreign housing exclusion or deduction