Foreign Housing Exclusion: How to Calculate and Claim Additional Tax Savings Beyond the FEIE

The conversation typically starts with surprise: “I’m claiming the foreign earned income exclusion for my $100,000 salary, but I’m paying $3,500 per month in rent in London – nearly $42,000 annually. Can I deduct any of that?” The answer creates relief – yes, through the foreign housing exclusion, which operates as an additional tax benefit beyond the $132,900 FEIE for 2026. Most expats know about the foreign earned income exclusion but miss the housing exclusion entirely, leaving thousands of dollars in legitimate tax savings unclaimed. The housing exclusion allows you to exclude or deduct qualifying housing costs that exceed a base amount, with the benefit varying dramatically based on where you live.

The foreign housing exclusion isn’t automatic, isn’t simple to calculate, and requires the same qualifying tests as the FEIE – but for expats living in high-cost international cities, it can exclude an additional $20,000 to $30,000 or more from taxable income. The mechanics involve calculating your base housing amount (16% of the FEIE, or $21,264 for 2026), determining which housing expenses qualify, applying location-specific caps that vary from the general limit of $39,870 up to higher amounts in the most expensive cities, and correctly reporting everything on Form 2555. Employees claim an exclusion from gross income, while self-employed individuals take a deduction that reduces self-employment income but not self-employment tax.

The stakes for getting this right extend beyond just maximizing your current year exclusion. Improper claims trigger IRS scrutiny of your entire Form 2555, potentially disallowing both the housing exclusion and your FEIE. Failing to claim the housing exclusion when you qualify means overpaying taxes by thousands of dollars annually – money that compounds over years of overseas assignments. Poor documentation of housing expenses creates problems during examinations when you need to prove every dollar claimed.

I’m going to walk you through exactly how the foreign housing exclusion works, which expenses qualify and which don’t, how to calculate your exclusion using the base amount and location-specific caps, the critical differences between employee exclusions and self-employed deductions, real calculation examples for three different cost-of-living scenarios, and a compliance checklist ensuring you claim every dollar you’re entitled to while maintaining bulletproof documentation.

How the Foreign Housing Exclusion Works

The foreign housing exclusion provides additional tax relief beyond the FEIE by allowing you to exclude or deduct qualified housing expenses that exceed a base amount. This benefit recognizes that Americans living abroad often face higher housing costs than they would in the United States, and the tax code provides relief for those excess costs.

The Basic Formula

Your foreign housing exclusion or deduction equals the lesser of:

• Your qualifying housing expenses minus the base housing amount – Total qualifying costs for the year, reduced by $21,264 (16% of the 2026 FEIE)
• Your location-specific cap – The maximum housing exclusion allowed for your location, ranging from $39,870 (general limit, 30% of FEIE) to higher amounts in the most expensive cities

This formula means you get no housing exclusion benefit until your housing costs exceed $21,264 annually ($1,772 per month). Only costs above that threshold qualify for exclusion, up to your location’s maximum.

Additional Benefit, Not Replacement

The housing exclusion operates in addition to, not instead of, the FEIE. You can claim both the $132,900 FEIE on earned income and the housing exclusion for qualifying housing costs. Combined, these two provisions can exclude $150,000 to $160,000 or more from U.S. taxation for expats in expensive cities.

Same Qualifying Tests Apply

To claim the foreign housing exclusion, you must meet the same tests required for the FEIE:

• Tax home in foreign country – Your tax home must be in a foreign country
• Physical presence test OR bona fide residence test – Meet either the 330-day physical presence requirement or establish bona fide residence
• Foreign earned income – Have foreign earned income during the year
• U.S. citizen or resident alien – Be a U.S. citizen or qualifying resident alien

If you don’t qualify for the FEIE, you don’t qualify for the housing exclusion.

Employee Exclusion vs. Self-Employed Deduction

The tax treatment differs based on your employment status:

• Employees – Claim housing exclusion on Form 2555, Part VI, which excludes housing amounts from gross income
• Self-employed individuals – Claim housing deduction on Form 2555, Part IX, which reduces net earnings from self-employment
• Critical difference – The housing deduction for self-employed does NOT reduce self-employment tax (Social Security and Medicare), only income tax

Qualifying Housing Expenses: What Counts and What Doesn’t

Not all housing costs qualify for the foreign housing exclusion. The IRS specifically defines which expenses you can include in your calculation.

Expenses That Qualify

You can include these reasonable expenses for foreign housing:

• Rent – Monthly rent payments for your foreign residence
• Utilities (limited) – Electricity, water, gas, heating oil for heating (NOT telephone, internet, cable TV, or streaming services)
• Real and personal property insurance – Insurance on your residence and contents (not life insurance or auto insurance)
• Non-refundable fees – Rental agency fees, lease acquisition costs, occupancy taxes not deductible under other provisions
• Residential parking – Parking included with your residence (not separate car parking)
• Furniture rental – Cost of renting furniture for an unfurnished residence
• Repairs and maintenance – Reasonable repair costs for tenant-responsible repairs

Expenses That Don’t Qualify

These expenses cannot be included, even if related to housing:

• Purchased furniture – Buying furniture doesn’t qualify (only rental furniture)
• Home purchase costs – Mortgage principal, property purchased, down payments
• Mortgage interest – Interest on loans to purchase property (may be deductible elsewhere as mortgage interest)
• Domestic labor – Maids, gardeners, housekeepers, or other household help
• Television and internet – Cable TV, satellite TV, internet service, streaming services
• Telephone – Phone service, mobile phones
• Improvements and capital expenses – Renovations, capital improvements, depreciation
• Lavish or extravagant expenses – Housing costs deemed unreasonable under the circumstances

Employer-Provided Housing

If your employer provides housing or a housing allowance:

• Included in income – Employer-provided housing value must be included in your gross income as compensation
• Then excludable – After including it in income, you can claim the housing exclusion for those same amounts if they’re qualifying expenses
• Net effect – The inclusion and exclusion offset, potentially resulting in no net tax on employer-provided housing up to the exclusion limit
• W-2 reporting – Your W-2 should show housing allowances as wages; if not properly reported, create complications

Documentation Requirements

Maintain detailed records supporting your housing exclusion claim:

• Lease agreements – Rental contracts showing monthly rent amounts
• Payment receipts – Bank statements, canceled checks, wire transfer confirmations showing payments made
• Utility bills – Bills for qualifying utilities (electricity, water, gas, heating)
• Insurance policies and bills – Property insurance documentation and payment proof
• Furniture rental agreements – Contracts and payment records if renting furniture

Location-Specific Caps and High-Cost Areas

The IRS publishes annual location-specific housing cost limits, recognizing that housing costs vary dramatically across the world. These limits cap your maximum foreign housing exclusion based on where you live.

The General Limit

For locations without a specific limit published by the IRS, the general limit applies:

• 30% of FEIE – General limit is 30% of the maximum FEIE
• 2026 amount – $39,870 (30% of $132,900)
• Minus base amount – Remember, only costs above $21,264 count, so maximum excess that can be excluded is $18,606 ($39,870 – $21,264) for general limit locations

High-Cost City Limits

The IRS designates certain high-cost locations with higher caps. For 2025 (the most recent IRS Notice available as of early 2026), examples included:

• Tokyo, Japan – $114,300
• Hong Kong – $114,300
• Singapore – $114,300
• London, England – $88,200
• Zurich, Switzerland – $107,100
• Geneva, Switzerland – $105,000
• Paris, France – $72,800
• Sydney, Australia – $77,000

The complete 2026 list will be published in IRS Notice 2026-XX (typically released in late 2025 or early 2026). You should verify your specific location’s limit when preparing your return.

Finding Your Location’s Limit

To determine your location-specific cap:

• Check IRS Notice – Look up the most recent IRS Notice listing foreign housing cost amounts (search “IRS foreign housing cost amounts 2026”)
• Find your location – Locations are listed by country and city
• Use general limit if not listed – If your city isn’t specifically listed, the $39,870 general limit applies
• Pro-rate for partial years – If you weren’t in the location for the full year, pro-rate the limit based on qualifying days

Multiple Locations During the Year

If you lived in multiple foreign locations during the tax year:

• Separate calculations – Calculate housing costs and limits for each location separately
• Pro-rate limits – Pro-rate each location’s limit based on the number of qualifying days spent there
• Combine totals – Add up the pro-rated limits to determine your overall cap
• Track carefully – Maintain detailed records of dates spent in each location

Calculating Your Foreign Housing Exclusion: Step-by-Step Examples

Let me walk through three real-world examples showing how to calculate the foreign housing exclusion for different situations.

Example 1: Employee in London (Under Cap)

Facts:

• Status: Employee of U.S. company, working remotely from London
• Income: $115,000 salary
• Housing costs: $47,000 annual rent + $3,200 utilities + $1,300 insurance = $51,500 total
• Days in London: All 365 days (meets physical presence test)
• London 2026 limit: Use 2025 limit of $88,200 (2026 limit pending IRS Notice)

Calculation:

• Step 1 – Total qualifying expenses: $51,500
• Step 2 – Subtract base amount: $51,500 – $21,264 = $30,236 excess housing costs
• Step 3 – Compare to location limit: $30,236 vs. $88,200 London cap
• Step 4 – Housing exclusion: $30,236 (lesser of excess or cap)

Tax benefit: This employee can exclude $115,000 (salary) using $132,900 (FEIE) + $30,236 (housing) = $163,136 total exclusions available. Since salary is only $115,000, essentially zero U.S. federal income tax on the salary.

Example 2: Self-Employed in Singapore (Hitting Cap)

Facts:

• Status: Self-employed consultant
• Income: $185,000 self-employment income
• Housing costs: $75,000 annual rent + $4,200 utilities = $79,200 total
• Days in Singapore: All 365 days (meets physical presence test)
• Singapore 2026 limit: Use 2025 limit of $114,300 (2026 limit pending IRS Notice)

Calculation:

• Step 1 – Total qualifying expenses: $79,200
• Step 2 – Subtract base amount: $79,200 – $21,264 = $57,936 excess housing costs
• Step 3 – Compare to location limit: $57,936 vs. $114,300 Singapore cap
• Step 4 – Housing deduction: $57,936 (lesser of excess or cap)

Tax impact: FEIE excludes $132,900, leaving $52,100 of income subject to U.S. tax. The housing deduction of $57,936 reduces self-employment income for income tax purposes (though not for self-employment tax). Net result: Substantially reduced U.S. income tax, but still owes self-employment tax on the full $185,000 (minus any business expenses).

Example 3: Employee in Costa Rica (General Limit)

Facts:

• Status: Teacher at international school
• Income: $68,000 salary
• Housing costs: $19,000 annual rent + $2,500 utilities = $21,500 total
• Days in Costa Rica: All 365 days (meets bona fide residence test)
• Costa Rica limit: $39,870 (general limit, not specifically listed)

Calculation:

• Step 1 – Total qualifying expenses: $21,500
• Step 2 – Subtract base amount: $21,500 – $21,264 = $236 excess housing costs
• Step 3 – Compare to location limit: $236 vs. $39,870 general cap
• Step 4 – Housing exclusion: $236 (lesser of excess or cap)

Tax benefit: Minimal housing exclusion ($236) because housing costs barely exceed the base amount. However, the $132,900 FEIE fully covers the $68,000 salary, resulting in zero U.S. federal income tax.

Employee vs. Self-Employed: Critical Differences in Treatment

The distinction between employee and self-employed status creates important differences in how you claim the foreign housing benefit and what it reduces.

Employee Housing Exclusion (Form 2555, Part VI)

Employees claim a housing exclusion that works as follows:

• Excludes from gross income – Reduces your adjusted gross income (AGI) for income tax purposes
• Stacks with FEIE – Claimed in addition to the foreign earned income exclusion
• Reduces income tax only – No impact on Social Security or Medicare taxes (already withheld from W-2 wages)
• Reported on Form 2555, Part VI – Separate section from FEIE calculation
• Flows to Form 1040 – Reduces income reported on Form 1040, line 1

Self-Employed Housing Deduction (Form 2555, Part IX)

Self-employed individuals claim a housing deduction with different characteristics:

• Deduction from self-employment income – Reduces net earnings from self-employment for income tax
• Does NOT reduce SE tax – Self-employment tax (15.3%) calculates on gross self-employment income minus business expenses, not including the housing deduction
• Claimed after FEIE – FEIE reduces self-employment income first, then housing deduction applies to remaining income
• Reported on Form 2555, Part IX – Separate section for self-employed filers
• Limited by remaining income – Cannot exceed your foreign earned income after FEIE

Mixed Income Situations

If you have both W-2 wages and self-employment income:

• Allocate housing expenses – Allocate expenses between W-2 and self-employment income based on the proportion of income from each source
• Apply limits separately – Employee exclusion and self-employed deduction have separate calculations
• Complex Form 2555 – Requires completing both Part VI and Part IX with proper allocations

Common Mistakes and Compliance Checklist

Frequent Errors to Avoid

These mistakes trigger IRS scrutiny and disallowances:

• Including non-qualifying expenses – Adding telephone, internet, furniture purchases, or domestic help to housing costs
• Forgetting to subtract the base amount – Claiming full housing costs instead of only the excess above $21,264
• Exceeding location caps – Claiming more than your location-specific limit allows
• Poor or missing documentation – Unable to provide lease agreements, payment receipts, or utility bills during examination
• Not pro-rating for partial years – Claiming full-year amounts when you didn’t qualify for the full year
• Mishandling employer-provided housing – Not including housing allowances in income before claiming exclusion
• Self-employed SE tax errors – Thinking housing deduction reduces self-employment tax (it doesn’t)

Your Foreign Housing Exclusion Compliance Checklist

Before filing Form 2555, verify you’ve completed these steps:

• Qualify for FEIE – Confirm you meet physical presence test (330 days) or bona fide residence test
• Calculate base housing amount – Verify 16% of current year FEIE ($21,264 for 2026)
• Identify qualifying expenses only – Include only rent, qualifying utilities, insurance, and other approved costs
• Determine your location limit – Look up your city’s specific cap in the IRS Notice or use $39,870 general limit
• Gather complete documentation – Collect lease agreements, payment receipts, utility bills, insurance statements
• Calculate excess housing costs – Total qualifying expenses minus $21,264 base amount
• Apply location cap – Use lesser of excess costs or location limit
• Pro-rate if necessary – Adjust for partial-year qualification or multiple locations
• Complete correct Form 2555 section – Part VI for employees, Part IX for self-employed
• Coordinate with FEIE – Ensure housing exclusion doesn’t exceed remaining foreign earned income after FEIE

Maximize Your Housing Exclusion With Professional Guidance

The foreign housing exclusion provides substantial tax savings for expats in high-cost cities – potentially $20,000 to $30,000 or more in additional exclusions beyond the FEIE. However, the calculation complexity, location-specific caps, documentation requirements, and coordination with other provisions create multiple opportunities for errors that trigger IRS examinations or leave legitimate savings unclaimed.

If you’re living abroad and paying significant housing costs, you should be evaluating whether the foreign housing exclusion applies to your situation. The difference between claiming and not claiming can mean thousands of dollars annually in unnecessary U.S. taxes. The difference between claiming correctly and incorrectly can mean IRS disallowances that eliminate both your housing exclusion and your FEIE, creating tax liabilities on income you thought was excluded.

Contact us for a comprehensive expat tax consultation that includes foreign housing exclusion analysis. We’ll review your housing costs, determine which expenses qualify, identify your location-specific cap, calculate your maximum exclusion or deduction, ensure proper Form 2555 reporting, and coordinate your housing benefit with FEIE and other provisions to minimize your global tax burden. If you’ve been living abroad without claiming the housing exclusion, we can evaluate whether amended returns would recover prior-year overpayments.

The foreign housing exclusion is complex, but the tax savings are real. Get expert guidance to claim every dollar you’re entitled to while maintaining compliance that withstands IRS examination.