The Foreign Housing Deduction (FHD) for Self-Employed Expats

Most self-employed expats are already well aware of the deductions they can claim to help offset the cost of running their business. But many aren’t quite as familiar with the Foreign Housing Deduction (FHD), which helps self-employed expats offset foreign housing costs. Using the FHD along with other tax breaks can greatly reduce — or even erase — your US tax liability.

Wondering what exactly the FHD is, who qualifies, and how you can make the most of it? We’ll answer all of these questions and more below.

What is the Foreign Housing Deduction (FHD)?

The Foreign Housing Deduction (FHD) is a US tax break for self-employed Americans living abroad. It allows eligible taxpayers to deduct a portion of their qualifying foreign housing expenses from their taxable income, which in turn reduces their overall tax burden.

The FHD vs. the FHE

A similar tax break called the Foreign Housing Exclusion (FHE) is available to US expats who work as employees. As its name suggests, though, the FHE is an exclusion — not a deduction. 

Unlike a tax deduction that reduces the amount of income subject to tax, the FHE allows you to directly exclude a portion of your foreign earned income from your taxable income, based on the amount you spend on housing in a foreign country.

The FHD & the FEIE

In order to claim the FHD, you must generally claim the Foreign Earned Income Exclusion (FEIE) as well. The FEIE is a separate but complementary expat tax break that lets qualifying US expats exclude a portion of their foreign earned income(not extending to passive income such as dividends, rental income or interest) from federal income taxes. 

In tax year 2024 (the taxes you’ll file in 2025), eligible expats can exclude up to $126,500 under the FEIE. This limit increases slightly each year due to inflation — in 2025, it will reach $130,000.

B!T note: The FHD is generally only worth claiming if your foreign self-employment income exceeds the FEIE limit.

While the FEIE can undoubtedly be a powerful tax relief tool, it may not be the best choice for everyone. Expats living in a country with higher taxes than the US may be better off claiming an alternate tax benefit: the Foreign Tax Credit (FTC). Before taking action, though, it’s important to consult a tax professional. 

Limitations to the FEIE

It’s worth noting that the FEIE excludes a portion of your earned income from federal income taxes only — not all taxes. Regardless of whether or not they claim the FEIE, self-employed expats cannot exclude their income from the 15.3% self-employment tax (12.4% for Social Security, 2.9% for Medicare).

What’s more, most states do not recognize the FEIE — so if you still qualify as a tax resident of a certain state, you may still be on the hook for state income taxes.

Who is eligible for the Foreign Housing Deduction?

The eligibility criteria for the FHD, FHE, and FEIE are all the same — taxpayers must meet at least one of two different tests: 

• Physical Presence Test: Be physically present outside of the US for at least 330 full days in any 365-day period overlapping the relevant tax year. Note that the 330 days abroad do not need to be consecutive
• Bona Fide Residence Test: Be an official resident of a foreign country for an interrupted period including at least one entire tax year. Temporary trips back home are okay, but your primary place of residence must remain in a foreign country
  • Note: It’s best to have official documents (e.g. residence cards, rental contracts, foreign income tax returns) on hand in case the IRS requests proof

Which expenses qualify for the Foreign Housing Deduction?

Under the FHD, you can claim a variety of reasonable housing expenses — especially those related to foreign rentals — but not necessarily all of them. A few common FHD-qualified housing expenses include: 

• Rent
• Utilities (excluding phone & TV service)
• Essential repairs
• Occupancy taxes
• Renters’ insurance & property insurance, in some cases
• Residential parking fees
• Furniture & accessory rental

The FHD does not however allow you to claim:

• Lavish or extravagant expenses
• Mortgage payments
• Non-essential improvements (e.g. remodeling an already-functional kitchen for aesthetic purposes)
• Furniture & accessory purchases
• Domestic labor (e.g. cleaning services)

As you may have noticed, the FHD does not cover most costs that come along with purchasing, owning, or renting out property. Fortunately, there are different kinds of tax relief for property ownership, such as mortgage interest deductions and rental property depreciation.

How to calculate the Foreign Housing Deduction

To calculate how much you can deduct from your taxable income under the FHD, you’ll need to:

1. Total your qualifying foreign housing expenses for the year. These costs typically must not exceed the general limit, defined as 30% of the maximum FEIE limit.

For tax year 2024, the general limit is $37,950 (.3 x $126,500).

Note that locations with a high cost of living may have a higher housing expense limit. Check the Determination of Housing Cost Amounts Eligible for Exclusion or Deduction for 2024 to see if the limit differs based on where you live.

2. Calculate the base housing amount (i.e. what the IRS assumes you would’ve spent on housing if you lived in the US). The base housing amount is always equal to 16% of the maximum FEIE limit.

For 2024, the base housing amount is $20,240 (.16 x $126,500).

B!T note: To claim the FHD, your qualifying foreign housing expenses must exceed the base housing amount.

3. Calculate the FHD maximum, which is equal to the general limit minus the base housing amount. 

In 2024, the FHD maximum is $17,710 ($37,950 – $20,240). However, this assumes you’ve spent all 365 days of the year outside of the US. 

4. If you spent less than 365 days in the US, you’ll need to calculate the per diem FHD allowance. You’ll do this by dividing the maximum exclusion — or your total qualifying foreign housing expenses, if they fall below the maximum exclusion — by 365.

In 2024, the maximum FHD daily exclusion allowance is $48.52 ($17,710 ÷ 365).

5. Finally, you’ll multiply your FHD daily allowance by the number of days you were in the US.

You can deduct the resulting amount from your taxable self-employment earnings.

How to claim the Foreign Housing Deduction

As we mentioned earlier, you’ll need to claim the FEIE in order to claim the FHD. To do this, you’ll complete and file IRS Form 2555 along with your US tax return. Form 2555 is a three-page form containing nine parts:

• Part I: Enter personal details like your name and full foreign address
• Part II: List the 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 the dates you spent in and outside of the US and share details about those trips
  • Note: Only for those who qualify for the FEIE via the Physical Presence Test; otherwise, ignore.

• Part IV: Share information about the income you earned outside of the US
• Part V: Indicate whether you plan to claim the FHD
• Part VI: Calculate your FHD allowance
• Part VII: Calculate your FEIE allowance
• Part VIII: Enter your total FEIE allowance
• Part IX: Calculate your FHD

Get expert help with the FHD & beyond

For self-employed US expats who a) plan on claiming the FEIE and b) have foreign self-employment income that exceeds the FEIE limit, the FHD is well worth exploring. While calculating your personal FHD allowance and reporting it on Form 2555 can be a bit tricky, it can pay off in the form of a substantially lower tax bill.