Foreign Housing Exclusion for US expats: Rules, limits, and how to claim
The foreign housing exclusion and deduction are available to qualifying US citizens and resident aliens with a foreign tax home and foreign earned income.
US citizens can qualify under either the bona fide residence test or the physical presence test. Resident aliens can qualify under the physical presence test, and resident aliens who are citizens or nationals of a country with an income tax treaty in effect can also qualify under the bona fide residence test.
For tax year 2025, the standard cap on qualifying housing expenses is $39,000, with higher limits in cities like Hong Kong ($114,300). If you paid rent or qualifying housing costs while abroad in 2025, this benefit could meaningfully lower your 2026 filing – start by checking the Form 2555 instructions to confirm your numbers.
Foreign housing exclusion: key facts for 2026
Before you start filling out Form 2555, it is worth scanning the headline numbers for 2025 income reported in 2026.
Important: the "standard cap" below is the maximum amount of housing expenses the IRS will consider, not the exclusion amount itself. Your actual exclusion equals qualifying expenses minus the base housing amount, subject to the cap and your earned-income limits.
| Item | 2025 amount |
|---|---|
| Foreign earned income exclusion (FEIE) | $130,000 per taxpayer |
| Standard cap on qualifying housing expenses | $39,000/year (~$106.85/day) |
| Base housing amount | $20,800 (16% of FEIE) |
| High-cost locality limit (Hong Kong) | $114,300 – see IRS Notice 2025-16 |
| Form required | IRS Form 2555 |
What is the foreign housing exclusion?
The foreign housing exclusion allows qualifying US citizens and resident aliens to exclude a portion of their housing costs abroad from US taxable income – but only for periods when their tax home is in a foreign country, and they meet either the bona fide residence or physical presence test.
For housing purposes, the exclusion applies to qualifying employer-provided amounts, and the deduction applies to qualifying self-employment earnings. Passive income, pensions, and investment income do not qualify.
Three terms are worth keeping straight before you calculate anything:
- Foreign housing expenses – the actual costs you paid: rent, utilities, insurance, and other qualifying items.
- Housing amount – what you get after subtracting the base: eligible housing expenses – $20,800 (for 2025) = housing amount, subject to your location's cap.
- Housing exclusion – the portion of the housing amount the IRS allows you to remove from taxable income, constrained by your foreign earned income for the year.
The housing exclusion is figured first on Form 2555, then the FEIE is calculated on the remaining foreign earned income. Specific caps and limits for 2025 are in the table above.
Foreign housing exclusion vs FEIE: what's the difference?
Both the FEIE and the housing exclusion or deduction are computed on Form 2555. The housing exclusion is figured first, then the FEIE is calculated on the remaining foreign earned income.
| FEIE | Foreign housing exclusion | |
|---|---|---|
| What it covers | Up to $130,000 of foreign earned income (2025) | Qualifying housing costs above the $20,800 base |
| Who can use it | Employees and self-employed | Employees (exclusion); self-employed (deduction) |
| Where on the form | Form 2555, Part VII | Form 2555, Part VI + VIII |
| Applied first? | No – figured after housing exclusion | Yes – housing exclusion is calculated first in Part VI |
Foreign housing deduction vs FHE: the difference
Employees generally use the foreign housing exclusion; self-employed taxpayers generally use the foreign housing deduction. Taxpayers with both types of income may split the housing amount between the two.
Self-employed taxpayers use the foreign housing deduction to reduce adjusted gross income, but it does not reduce self-employment tax.
Unused housing deduction may carry over to the following year in some cases, under IRC Section 911(c)(4).
Employees claim the exclusion in Parts VI and VIII; self-employed taxpayers claim the deduction in Part IX – the two paths are not interchangeable on Form 2555.
| Employees | Self-employed | |
|---|---|---|
| Benefit type | Exclusion | Deduction |
| Where on Form 2555 | Part VI, VIII | Part VI, IX |
| Reduces self-employment tax? | N/A | No |
| Carryover of unused amount? | No | Yes, in some cases |
Who qualifies for the foreign housing exclusion?
Eligibility has a few distinct layers, and missing any one of them disqualifies the entire benefit. The full eligibility picture for US expats is worth reviewing before you file.
To claim the foreign housing exclusion or deduction, all four of the following must be true:
✅ Your tax home is in a foreign country.
✅ You have foreign earned income.
✅ You pass either the bona fide residence or physical presence test.
❌ You are not an employee of the US government abroad.
As a general rule, income from US government employment abroad does not qualify for the foreign earned income exclusion, the housing exclusion, or deduction. Limited exceptions, including certain combat-zone rules and housing-allowance rules, can change the result.
Bona fide residence test
The bona fide residence test is not a simple day count – it is a facts-and-circumstances analysis. You must maintain a bona fide residence in a foreign country for an uninterrupted period that includes an entire calendar year, with your tax home abroad throughout.
The IRS looks at the full picture of your life abroad. Factors that carry significant weight include your visa or residency status, whether you hold a long-term lease or property in the host country, whether your family and social ties are centered abroad, and how integrated you are into the local community.
Physical presence test
The physical presence test has one bright-line rule: 330 full 24-hour days in foreign countries during any 12-month period. Partial days, time over international waters, and days spent in the US do not count.
The 12-month window does not have to align with the calendar year. A consultant who moved to Spain on March 1, 2025, for example, could use the window March 1, 2025 through February 28, 2026 – counting days from both tax years to hit the 330-day threshold and qualify for the foreign housing exclusion on 2025 income.
Tax home test: the rule many expats miss
This is the eligibility requirement that catches people off guard, and the most common reason the foreign income housing exclusion gets denied. Even if you pass the 330-day count or have a bona fide residence abroad, you still do not qualify if your abode – your regular or principal place of living – remains in the United States.
Here is a practical example. A consultant works in Germany for 11 months and easily meets the physical presence test. But his spouse and children remain in a US home, he returns most weekends, and his primary financial ties are domestic.
The IRS may conclude his abode is still in the US, blocking the exclusion entirely despite the day count. Your tax home must be in a foreign country throughout the qualifying period.
What housing expenses qualify for exclusion?
Not every cost of living abroad counts – the IRS has a specific definition, and the list is narrower than most people expect.
Only reasonable foreign housing expenses paid or incurred during qualifying periods count, and they must not already be excluded from income under another provision.
Housing expenses that qualify
These costs qualify as Form 2555 qualified housing expenses under IRS instructions:
- Rent for your principal home abroad – the core of your foreign housing expenses.
- Utilities (electricity, gas, water, sewer) – telephone charges are explicitly excluded.
- Renter's or property insurance – ordinary coverage on the dwelling.
- Nonrefundable lease fees – upfront costs you cannot recover at the end of a lease.
- Furniture rental – temporary furnishings needed for the leased property.
- Residential parking fees.
- Minor repairs and maintenance – costs that keep the property habitable.
Housing expenses that do not qualify
The following are specifically excluded under IRS rules – this list mirrors IRS language more closely than most guides do, which matters if you are ever audited.
- Buying or improving real estate – purchase price, down payments, or capital renovations.
- Mortgage interest, principal, or deductible property taxes – ownership costs are not foreign housing expenses and may only appear on Schedule A.
- Depreciation on owned property.
- Pay for television subscriptions.
- Furniture or accessories purchased outright – only rental qualifies.
- Domestic help or gardening services.
- Meals or groceries.
- Lavish or extravagant outlays – luxury properties, yachts, or comparable excesses.
How to calculate your foreign housing exclusion
Calculating the housing deduction from Form 2555 is straightforward in most cases, but two situations add complexity: qualifying for only part of 2025, and moving between countries mid-year.
Before you start, the foreign housing exclusion calculator gives you a quick estimate to work from.
If you qualify for fewer than 365 days, the cap must be prorated. Multiply $106.85 (the daily default) by your number of qualifying days. If you lived in two foreign locations in 2025, calculate each period separately using the applicable city cap, then combine.
High-cost localities and housing expense limits
The IRS publishes location-specific caps in Notice 2025-16. This is the foundation of the foreign housing exclusion by country framework – if your city appears on the list, use that cap; if it does not, the standard $39,000 annual limit applies.
| City | Full-year cap | Daily cap | When to use it |
|---|---|---|---|
| Hong Kong | $114,300 | $313.15 | Listed in Notice 2025-16 |
| Luanda | $84,000 | $230.14 | Listed in Notice 2025-16 |
| Tokyo | $67,700 | $185.48 | Listed in Notice 2025-16 |
| All other locations | $39,000 | $106.85 | Default – city not listed |
The limit on housing expenses on Form 2555 for a partial year is calculated by multiplying the applicable daily rate by the number of qualifying days, not by applying the full annual cap.
How to convert foreign housing expenses into US dollars
When you paid housing costs in a foreign currency, you need to convert them to USD before entering them on Form 2555. The IRS does not publish an official exchange rate – use any reasonable posted rate and apply it consistently throughout the year.
If your housing costs are evenly distributed, as rent typically is, the IRS generally accepts the yearly average exchange rate.
Keep documentation showing which rate you used, along with the source, in case the IRS asks.
Foreign housing exclusion example: full calculation
This foreign housing exclusion example shows exactly how the math works for a typical expat in a high-cost city.
Based on a TFX client scenario: a US consultant lived in Hong Kong for all of 2025 and earned $180,000 in foreign earned income. She paid $48,000 in rent and utilities (telephone excluded).
Step 1 – Check the cap. Hong Kong's 2025 cap under Notice 2025-16 is $114,300. Her $48,000 in expenses falls well below it.
Step 2 – Identify qualifying expenses. All $48,000 counts as Form 2555 qualified housing expenses (rent and utilities, with no telephone or cable included).
Step 3 – Subtract the base housing amount. $48,000 minus $20,800 equals $27,200 housing amount.
Step 4 – Confirm the cap. $27,200 is below the $114,300 Hong Kong cap, so the full $27,200 is excludable.
Step 5 – Report on Form 2555. Enter the housing amount in Part VI. The exclusion flows through Part VIII and reduces taxable income via Schedule 1 of Form 1040.
Result: the consultant excludes $27,200 in housing costs on top of any FEIE claimed – reducing her US tax bill significantly, without touching the foreign tax credit.
How to claim the foreign housing exclusion on Form 2555
Claiming the benefit requires one form – Form 2555 – filed with your 2025 Form 1040 (the return you submit in 2026). The Form 2555 housing foreign income exclusion workflow has four clear steps.
Step 1 – Confirm eligibility. Verify that you passed the bona fide residence or physical presence test for 2025 and that your tax home was abroad throughout the qualifying period.
Step 2 – Calculate housing expenses. Gather receipts and bank statements for every qualifying cost. Convert foreign-currency amounts to USD using a reasonable posted rate, applied consistently throughout the year.
Step 3 – Complete Form 2555. Use Part VI to calculate the housing deduction Form 2555 allows. Carry the exclusion amount through Part VIII. If you are self-employed, Part IX handles the deduction instead.
Step 4 – Attach and file. Attach the completed Form 2555 to your 2025 Form 1040. The housing exclusion reduces income through Schedule 1 before landing on the main return.
Where the housing exclusion goes on Form 2555
The Form 2555 housing exclusion and the deduction move through different parts of the form depending on your employment status.
Employees use Part VIII to finalize the exclusion; self-employed taxpayers use Part IX for the deduction – using the wrong part overstates the benefit and will be corrected by the IRS.
| Part of Form 2555 | What it does |
|---|---|
| Part VI | Calculates the housing amount (expenses minus base, subject to cap) |
| Part VII | Calculates the FEIE |
| Part VIII | Combines FEIE and housing exclusion; total flows to Schedule 1 |
| Part IX | Housing deduction for self-employed (reduces AGI, not self-employment tax) |
The 2555 housing exclusion from Part VIII flows to Schedule 1 of Form 1040, reducing your adjusted gross income before the standard or itemized deduction applies.
How expat couples should claim the housing exclusion
If both spouses qualify, each may need a separate Form 2555. For the same foreign household on a joint return, spouses may figure the housing amount jointly or separately – but they cannot double-count the same housing expenses.
| Scenario | How the housing exclusion works |
|---|---|
| Same household, joint return | Either spouse – not both – claims the combined housing exclusion for the shared home |
| Same household, separate returns | Each spouse figures out their housing amount independently |
| Separate foreign households | Additional commuting-distance rules apply; each spouse's claim may be limited based on proximity |
Foreign housing exclusion vs foreign tax credit: when each works better
This is one of the most consequential decisions US expats face, and the IRS limits your flexibility once you choose. If you claim the foreign housing exclusion or deduction, you cannot also claim deductions or credits directly related to excluded income.
The two strategies overlap, and choosing one reduces the value of the other on the same dollars.
For expats paying little or no foreign tax, the housing exclusion wins. For those in high-tax countries, the Foreign Tax Credit typically eliminates the US liability entirely – making the exclusion unnecessary.
| Scenario | Better choice |
|---|---|
| You pay little or no foreign tax (UAE, Cayman Islands) | Foreign housing exclusion – excludes income before tax applies |
| Your foreign tax rate exceeds the US rate | Foreign Tax Credit – offsets dollar for dollar |
| Mixed income (wages and self-employment) | Combination may apply – professional advice recommended |
The Form 1116 foreign tax credit and the foreign housing exclusion can be used on the same return – but not on the same income. FTC applies to income outside the exclusion, such as passive or investment income.
Common mistakes when claiming the foreign housing exclusion
The housing foreign income exclusion is one of the more technical areas of expat tax law, and small errors can mean losing the benefit entirely.
- Forgetting the tax home test. Meeting the 330-day rule does not automatically qualify you. If your abode remains in the US, the IRS may deny the benefit regardless of the day count.
- Using the wrong cap. Many expats apply the standard $39,000 limit without checking Notice 2025-16 for their city. If you lived in a high-cost location, that oversight is costly.
- Not prorating for partial years. If you were abroad for only part of 2025, both the cap and the base amount must be prorated by qualifying days. Applying full-year figures to a partial year overstates the exclusion.
- Mixing up exclusion and deduction. Employees should use the exclusion path (Parts VI and VIII). The Form 2555 housing deduction in Part IX is for self-employed taxpayers only. Using the wrong part triggers IRS questions.
- Ignoring state taxes. States like California, New York, and Virginia may still tax income excluded at the federal level. Check your state residency status and withholding separately. Form 673 can help reduce expected US federal income tax withholding on qualifying foreign wages, but it does not control state income tax withholding.
- Claiming the exclusion and the credit on the same income. If you used the foreign tax credit vs foreign earned income exclusion path on certain income, you cannot also exclude that same income under the housing exclusion.
Get the filing aid you need from experts
Navigating the foreign housing exclusion – especially with location-based limits and dual-income households – can be complex. Taxes for Expats has helped thousands of Americans living abroad claim every dollar they’re entitled to, with expert CPAs who focus on US tax. Let us handle the forms, so you can focus on life abroad.
Foreign Housing Exclusion FAQ
Yes, if you had both wage income and self-employment income in 2025. You may exclude the employer-provided portion and deduct the self-funded portion using the foreign housing exclusion and deduction rules on Form 2555. You cannot apply both benefits to the same dollars.
Yes, but only if you meet the IRS foreign housing exclusion eligibility tests. You do not have to claim the full FEIE amount, but you must meet the same tax home and residence requirements.
Not on the same expenses. For the same foreign household on a joint return, spouses may figure the housing amount jointly or separately – but either spouse, not both, can claim the exclusion or deduction. For separate foreign households, additional rules apply.
Reasonable hotel rent counts as a housing expense when the hotel serves as your primary residence abroad. Short-term, vacation, or lavish lodging does not qualify.
No. Mortgage interest and principal are not qualifying foreign housing expenses under IRS rules. Only rent and specified costs for a rented property count. If you own your home abroad, your qualifying costs are very limited.
The IRS publishes location-specific caps in Notice 2025-16. If your city is listed, use that cap. If not, the default $39,000 annual cap (or $106.85 daily) applies. For partial years, multiply the daily rate by your qualifying days.
No. Neither the exclusion nor the housing deduction from Form 2555 reduces self-employment tax. Both reduce income tax only. Self-employed expats pay SE tax on net self-employment income regardless of any exclusions claimed.
In some cases, yes – by filing an amended return (Form 1040-X with Form 2555) within three years of the original filing deadline. However, electing or revoking the exclusion has multi-year consequences under Section 911, and re-election may require IRS approval. If you missed the exclusion in a prior year, consult a tax professional before amending.
