How to Use the Foreign Housing Exclusion to Lower Your U.S. Tax Bill

Living abroad can be an adventure—new culture, new coffee, new rent receipts. But if you’re a U.S. taxpayer overseas, there’s one perk you don’t want to miss: the Foreign Housing Exclusion.

The Foreign Housing Exclusion (FHE) allows qualified expats to deduct certain housing costs from their taxable income—on top of the Foreign Earned Income Exclusion. That means a lower U.S. tax bill and more room in your budget for things like rent, utilities, and possibly the world’s strongest Wi-Fi plan.

To claim it, you’ll need to understand key factors like your tax home, qualified housing expenses, and the base housing amount the IRS expects you to cover out of pocket. Let’s break it down—and help you keep more of your money while living your best expat life.

What is the Foreign Housing Exclusion?

The Foreign Housing Exclusion (FHE) is a valuable tax break that lets qualifying U.S. expats reduce their gross income by excluding certain foreign housing costs—like rent and utilities—from their U.S. tax return.

It works alongside the Foreign Earned Income Exclusion (FEIE), which allows expats to exclude up to $130,000 (for 2025) of foreign-earned income. The FHE gives you even more room to lower your income tax bill if your living expenses abroad are high.

To qualify, you must:

• Have foreign earned income
• Live in a foreign country
• Meet either the bona fide residence test or the physical presence test
• Pay for qualified housing expenses out of pocket

The amount you can exclude is calculated by subtracting a base housing amount (set by the IRS) from your actual expenses, up to a maximum amount that depends on your location. For example, expats in high-cost cities like London or Hong Kong may be eligible for a much higher exclusion than those living in lower-cost regions.

You’ll claim the exclusion using IRS Form 2555, which covers both the FEIE and the FHE. Used strategically, the FHE can significantly reduce your taxable income—and serve as one more reason not to miss filing your expat return on time.

Who qualifies for the Foreign Housing Exclusion?

To qualify for the Foreign Housing Exclusion, you need to meet a few IRS rules that are specific to expats living and working abroad. Here’s what it takes:

• Your tax home must be in a foreign country. This means your main place of business—not just where you sleep at night—must be outside the U.S.
• You must pass one of two residency tests: The Bona Fide Residence Test (resident of a foreign country for a full tax year) or the Physical Presence Test (present in a foreign country for at least 330 full days in a 12-month period).
• You must have earned income abroad and paid for qualified housing expenses out of pocket.
• You must be a U.S. citizen or a qualifying resident alien.

If you meet these criteria, you may be able to exclude part of your gross income using the FHE—especially if your housing costs exceed the base amount and you qualify for the maximum foreign earned income exclusion.

What counts as foreign housing expenses?

Not every expense qualifies—but the IRS does allow a range of common housing costs to be excluded from your taxable income if you meet the eligibility rules.

Qualified foreign housing expenses include:

• Rent paid for your primary residence abroad
• Utilities (excluding telephone bills)
• Property insurance
• Fees for residential parking
• Reasonable costs for furnishings, residential repairs, and domestic labor (like a nanny)

What doesn’t count:

Lavish or extravagant housing costs, buying a home, mortgage interest, or capital improvements. The IRS is generous, but not that generous.

Employer-provided housing:

If your employer pays for part (or all) of your housing, that amount reduces what you can exclude. Only out-of-pocket expenses can be used toward the exclusion.

How to calculate your foreign housing exclusion

The Foreign Housing Exclusion isn’t a flat number—it’s calculated based on how much you spend and where you live. Here’s how to figure out what you can claim:

Step 1: Add up your qualified housing expenses

Include rent, utilities (except phone), property insurance, and other reasonable housing costs you paid out-of-pocket.

Step 2: Identify your base housing amount

The IRS subtracts a “base” amount from your total before allowing any exclusion. In 2025, this base amount is:

• $20,800 per year (16% of the $130,000 FEIE)
• Or about $56.99 per day if you didn’t live abroad the entire year

Step 3: Know the maximum you can claim

The IRS sets a standard cap of $39,000 per year (30% of the FEIE), though this can be higher if you live in a designated high-cost city.

Step 4: Subtract the base from your actual expenses

Whatever’s left after subtracting the base is your eligible exclusion—up to the IRS limit for your location.

For example:

Let’s say you spent $40,000 on eligible housing in 2025. Your base housing amount is $20,800, so you can potentially exclude:

$40,000 – $20,800 = $19,200.

Since this is under the standard cap, you can exclude the full $19,200.

Step 5: File Form 2555 to claim it

You’ll use IRS Form 2555 along with your Form 1040 to officially claim the Foreign Housing Exclusion.

Additional Considerations for the FHE Exclusion

Before you finalize your housing exclusion calculation, here are a few key details that could impact your tax situation—especially if you’re married, have kids, or are using other expat tax strategies.

Married couples and dual earners

If you’re filing jointly and both spouses meet the residency requirements and have earned income, each of you may qualify for the FEIE and the housing exclusion separately. This can significantly increase the total amount excluded from your taxable income.

However, each spouse must qualify independently—and you cannot claim the same housing expenses twice. In other words, no double-dipping: shared housing costs can only be claimed once between you.

Dependents

While dependents don’t affect your housing exclusion directly, they can impact your overall tax bill. You may qualify for the Child Tax Credit, Additional Child Tax Credit, or other dependent-related benefits.

Interaction with other tax strategies

You can’t apply both the Foreign Tax Credit (Form 1116) and the Foreign Housing Exclusion to the same income. It’s important to calculate which combination gives you the best tax outcome.

And a quick heads-up for the self-employed: neither the FEIE nor the FHE reduces self-employment tax. Unless you’re covered by a totalization agreement with your host country, you’ll still owe 15.3% on net earnings.

How to claim the exclusion on your tax return

To claim the Foreign Housing Exclusion, you’ll need to file IRS Form 2555 alongside your federal tax return (Form 1040). This form calculates both your Foreign Earned Income Exclusion (FEIE) and your housing exclusion amount—and yes, it’s worth the effort.

Here’s how to do it:

Step 1: Determine your tax home and residency status

You must confirm your tax home is in a foreign country and that you meet either the bona fide residence test (you lived abroad for an entire tax year) or the physical presence test (you were in a foreign country for at least 330 full days in a 12-month period). You’ll need to include your qualifying dates on Form 2555.

Step 2: Calculate your total foreign earned income

This includes salary, self-employment earnings, and other compensation earned while living abroad. Keep accurate records, especially if your income includes employer-provided amounts or bonuses.

Step 3: Track your housing expenses

You’ll need documentation showing qualified foreign housing costs—things like rent, utilities (excluding phone), property insurance, and basic household furnishings. Keep receipts or statements for every expense.

Step 4: Complete Form 2555

Report your total foreign earned income, the number of qualifying days, and your foreign housing costs. The form will calculate the exclusion amount you can apply to reduce your taxable income.

Step 5: File your return

Attach Form 2555 to your federal income tax return (Form 1040) and submit it by the tax deadline. If you’re abroad on April 15, you get an automatic extension until June 15, but taxes owed are still due by April 15. You can also request a further extension to October 15 if needed.

When should you consider the Foreign Housing Deduction instead?

While the Foreign Housing Exclusion is designed for employees working abroad, self-employed expats may qualify for the Foreign Housing Deduction—a similar but slightly different tax benefit under Form 2555.

This deduction allows you to subtract eligible housing expenses from your gross income, rather than excluding it entirely like you would with the FHE. That can be helpful in certain situations, especially if:

• You’re self-employed and your housing costs are high relative to your income
• You don’t qualify for the full Foreign Earned Income Exclusion due to low income or limited qualifying days
• You’re living in a high-cost location and your housing expenses exceed the standard exclusion limits

To qualify, you must:

• Have a tax home in a foreign country
• Meet either the bona fide residence test or the physical presence test
• Not have any employer-provided housing benefits (or account for them properly)

Still not sure which is right for your situation? Comparing both options—or running the numbers in a tax planning tool—can reveal which provides the greater tax benefit for your unique expat setup.

Common filing mistakes and how to avoid them

The Foreign Housing Exclusion can save you thousands, but only if you calculate and report it correctly. Here are a few mistakes that trip up even seasoned expats:

• Forgetting the base housing amount: The exclusion only covers qualifying expenses above the base, not the full amount. Missing this step means overstating your exclusion—and risking IRS scrutiny.
• Misreporting housing expenses: Not everything counts. Expenses like cable TV, telephone bills, or luxury accommodations don’t qualify. Only reasonable costs like rent, utilities, and property insurance should be included.
• Using incorrect exchange rates: All amounts must be converted to USD. Using inconsistent or outdated exchange rates—especially if you paid expenses in multiple currencies—can cause reporting errors.
• Filing Form 2555 incorrectly: Incomplete or inaccurate information (like dates that don’t line up with the physical presence test) can delay processing or lead to disqualification. Double-check every section—especially residency dates and expense totals.

Turn housing costs into tax savings

If you’re living abroad and paying out of pocket for housing, the Foreign Housing Exclusion could significantly lower your U.S. tax bill. When combined with the Foreign Earned Income Exclusion, it’s one of the most powerful tools in the expat tax toolkit.

The key? Accurate filing. Understanding what counts, tracking your expenses, and avoiding common mistakes ensures you get every dollar of tax relief you’re entitled to—while staying fully compliant with IRS rules.

Need help getting it right? Bright!Tax specializes in U.S. tax filing for Americans abroad. Our expert CPAs know the ins and outs of expat tax rules (including the finer points of the FHE), and we’re here to help you file with confidence.

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