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If you’re a US expat looking to reduce your tax bill, it’s well worth looking into the Foreign Housing Exclusion (FHE). While it may not be as well-known as some of the other expat tax breaks, the FHE is a valuable tool to have at your disposal. Claiming the exclusion can help you offset foreign housing costs, lower your taxable income, and ultimately, reduce your US tax liability.
But what exactly does the FHE consist of, who qualifies for it, and how can you claim it? We’ll go over all of that and more below.
What is the Foreign Housing Exclusion?
As you may already know, all American citizens and permanent residents who earn above a certain threshold must file (and potentially pay) US taxes — even those who live abroad. This puts expats who are subject to taxes in another country at risk of having to pay taxes on the same income to two different countries.
Fortunately, the US offers several dedicated tax breaks for expats to help them avoid this double taxation. One of these tax breaks is the FHE, which allows Americans abroad to exclude a portion of their income from taxation based on qualifying foreign housing expenses.
Note:
The FHE is The FHE is specifically for expats who work for an employer. Self-employed expats can claim this provision, albeit under a slightly different name: the Foreign Housing Deduction (FHD).
The FHE & the FEIE
Closely related to the FHE is the Foreign Earned Income Exclusion (FEIE). The FEIE is a tax break that lets Americans exclude a certain amount of otherwise taxable foreign earned income from federal income taxes each year.
For tax year 2024 (the taxes you pay in 2025), you can exclude up to $126,500 under the FEIE. In 2025, the limit increases to $130,000 to account for inflation.
However, you can pair the FEIE with the FHE to effectively increase your amount of foreign earned income available for exclusion. This makes it an especially good fit for those who earn above the maximum Foreign Earned Income Exclusion limit.
Unlike the FEIE, the FHE does not have a flat limit. Instead, you’ll need to calculate how much you can exclude (or deduct, in the case of self-employed expats).
Note:
Expats who pay higher income tax rates abroad than in the US may be better off claiming the Foreign Tax Credit (FTC) instead of the FEIE and FHE.
Who qualifies for the Foreign Housing Exclusion?
The FHE isn’t available to all US expats. To qualify for the Foreign Housing Exclusion or Deduction, you must meet the same eligibility requirements as the FEIE. This means meeting one of two different tests:
Bona Fide Residence Test
The Bona Fide Residence Test states that you must be a “bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year.”
The IRS determines whether you are a bona fide resident based on the social and economic ties you hold in your country of residence. You should have documents that prove these ties (e.g. residence card, mortgage agreement, foreign income tax return) on hand in case the IRS requests proof.
Note that the IRS may not consider you a bona fide resident if you plan to leave on a fixed date, such as if you’re living and working in your country of residence on a two-year contract. They may also fail to consider you a bona fide residence if the US remains your center of social and economic interests.
Physical Presence Test
To meet the Physical Presence Test requires you to be physically present in a foreign country or countries for at least 330 full days in any period of 365 consecutive days overlapping the tax year.
Note:
Only full days outside of the US (i.e. 24 hours) count toward the Physical Presence Test.
Unlike the Bona Fide Residence test, you don’t need residency in another country to pass the Physical Presence Test. However, your tax home — i.e. the place where you most often work or conduct business — must be outside the US.
Whether or not you plan to return to the US also doesn’t matter for the purposes of the Physical Presence Test.
Which expenses are covered by the Foreign Housing Exclusion?
The FHE allows expats to exclude/deduct a wide range of reasonable housing expenses for any part of the year that you qualified for the FEIE. Some of the main qualifying housing expenses include:
- Rent
- Utilities
- Note: Phone bills and TV services do not count as utilities.
- Necessary repairs
- Occupancy taxes
- Renters’ insurance & property insurance, if not already provided by the landlord
- Fees for securing a lease
- Residential parking
- Rental of furniture & accessories
The FHE does not cover:
- Expenses considered “lavish or extravagant”
- Mortgage payments
- Improvements made solely to increase a property’s value or appreciable lifespan
- Purchased furniture & accessories
- Cleaning/housekeeping expenses
Make sure to keep receipts for qualifying expenses on hand in case the IRS requests them.
Tip:
While most of the costs associated with buying or owning property don’t count as qualifying FHE expenses, you may be able to claim other tax breaks such as mortgage interest deductions or depreciation on rental property.
How to calculate the Foreign Housing Exclusion
The FHE limit is based on the FEIE. Since the FEIE limit increases annually due to inflation, the FHE limit does, too. To calculate how much you can exclude, you’ll need to:
- Calculate the base housing amount. The base housing amount is 16% of the FEIE limit. This is what the IRS assumes you would have paid for housing had you resided in the US.
Given the 2024 FEIE limit of $126,500, the base housing amount this tax year is $20,240 ($126,500 x .16). But again, this number will increase slightly each year.
- Calculate the general limit, which is equal to the FEIE limit multiplied by 30%.
For the 2024 tax year, the general limit is $37,950 ($126,500 x 0.30).
Tip:
The general limit does not apply to all countries. Carefully review the back of Form 2555 to see whether your country has a specific agreed-upon figure with the IRS. Neglecting to do so could cost you serious tax dollars, so don't leave money on the table!
- To calculate the maximum foreign housing exclusion you can claim, you’ll subtract the base housing amount from the general limit.
Note:
Qualifying housing expenses must exceed the base housing amount to claim the FHE.
For the 2024 tax year, the most you can exclude under the FHE is $17,710 ($37,950 – $20,240). However, this assumes you spent all 365 days of the year outside of the US.
- If you spent less than 365 days outside of the US, you’ll divide the maximum exclusion ($17,710) by 365 to get the daily exclusion amount: $48.52.
- Finally, you’ll multiply the daily exclusion allowance by the number of days you spent outside of the US to get your personal FHE total.
If you spent 344 days out of 365 outside of the US, for example, your personal FHE total would be $16,690.88 ($48.52 x 344). You can exclude the resulting amount — plus any income you can exclude under the FEIE — from federal income taxes.
How to claim the Foreign Housing Exclusion
To claim the FHE, you’ll have to claim the FEIE. You can do this by filing IRS Form 2555 along with your US tax return. The form consists of nine parts in total, but those claiming the FHE only need to fill out the first eight as the ninth is for the FHD:
- Part I: Personal details like your name and full foreign address
- Part II: Start dates, end dates (if applicable), and other details of your Bona Fide Residence
- Note: Only for those who qualify for the FEIE via bona fide residence; otherwise, ignore.
- Part III: Log of the dates you spent in and outside of the US as part of your Physical Presence Test and other details related to your stays
- Note: Only for those who qualify for the FEIE via the Physical Presence Test; otherwise, ignore.
- Part IV: Details of the income you earned outside of the US
- Part V: Indicate whether you plan to claim the FHE
- Part VI: Calculate your FHE
- Part VII: Calculate your FEIE
- Part VIII: Enter the total of your FEIE and FHE
Claiming the Foreign Housing Exclusion as a couple
FHE eligibility for couples is based on each person’s individual foreign earned income, even if they’re married and filing jointly. When claiming housing expenses, each spouse must report only their respective share of housing expenses. The split of housing costs must be reasonable and consistent with the facts and circumstances. For instance:
- If both spouses contribute equally to household expenses, a 50/50 split may be appropriate.
- Alternatively, housing costs may be divided proportionate to each spouse’s foreign earned income if contributions to household expenses differ significantly.
Married expat couples who file jointly but live in separate households can each claim housing expenses for their respective homes, provided the homes aren’t within a short commuting distance.
Note:
The situation gets a bit more complex if one of the spouses or partners is a non-resident alien (NRA).
Get expert help claiming the Foreign Housing Exclusion & more
The FHE is a valuable tool for Americans living abroad, particularly if they earn above the FEIE limit. If you qualify for the FHE through either the Bona Fide Residence Test or Physical Presence Test, it’s well worth exploring as a tool in your overall tax strategy. Keep in mind, though, that FHE calculations and filing can get complex.
Resources:
- Foreign housing exclusion or deduction
- Figuring the foreign earned income exclusion
- IRS releases tax inflation adjustments for tax year 2025
- Foreign earned income exclusion – bona fide residence test
- Foreign earned income exclusion – Physical presence test
- Foreign earned income exclusion
- When Is Employee Housing Taxable to the Employee?
- Determination of Housing Cost Amounts Eligible for Exclusion or Deduction for 2024
