Foreign Housing Tax Savings for Expats- Navigating Foreign Housing Expenses Tax Exclusions and Deductions

The Foreign Earned Income Exclusion (FEIE) is one of the most well-known and most utilized tax instruments for U.S. expats. Although it is true that the FEIE is an incredible tool and should be used as often as permissible, it must be emphasized that it is only one of several available to expats. The lack of knowledge of the resources available to expat taxpayers often results in them ‘leaving their own money on another table’.  In this article, we will specifically focus on how U.S. citizens and resident aliens living abroad can achieve tax savings by using the Foreign Housing Exclusion (FHE) or the Foreign Housing Deduction (FHD).

If you qualify for the FEIE, with the exception of a few distinctions, you should be well positioned to take advantage of these two great savings tools. In summary, if you meet the qualifying factors, the FEIE allows you to exclude up to $130,000 of your foreign earned income if your filing status is single, and $260,000 if your filing status is married filing jointly in 2025. That means that depending on your foreign earned income, you may be able to exclude a significant portion of your income (or even all) from being taxed by the U.S. Qualifying for the FEIE opens the door for housing expense tax benefits.

To be crystal clear, the FHE and the FHD generally have the same requirements as the FEIE, and are claimed directly on Form 2555 (FHE) or reported on Form 1040 Schedule 1 (FHD). The FHE and FHD functionally work in a nearly identical manner, though the major distinction between the two is found in the types of taxpayers that each respectively serves. For more information on the FEIE, please read this article.

Similar to the FEIE (with one additional requirement listed below), in order to qualify for the FHE or the FHD the following is required:

• Your tax home must be in a foreign country, and you must pass either the physical presence or bona fide residence tests;

• You must have foreign earned income; and

• Your housing costs must be more than the 2025 base housing amount of $20,800 ($106.85 per day) in 2025.

The base housing amount is what the IRS deems is the minimum amount of housing expenses that is comparable to the United States. In essence, the IRS will not give you credit for foreign housing expenses that fall below this threshold. Unfortunately, this minimum is a deal breaker for those expats that may live in more affordable countries where their annual housing expenses do not meet the base housing amount. For example, if you live on the coast of East Africa and your housing expenses only amount to $12,000, you will not qualify for either the FHE or FHD.  

The Foreign Housing Exclusion

You can take the Foreign Housing Exclusion if your earned income derived from an employer. Conversely, if the entirety of your earned income is from self-employment, you would instead take the foreign housing deduction. However, if you have earned income that derives from both an employer and self-employment, you are able to proportionally claim the FHE and FHD.

Here are some of the housing expenses that can be excluded:

·       Rent

·       Utilities

·       Household Repairs

·       Residential Parking

·       Real and personal property insurance

·       Furniture rental

·       Some personal property taxes

There are also many costs that cannot be excluded such as mortgage payments, depreciation expenses and telephone bill charges.

The amount of housing expenses that you can exclude is based on a formula that is dependent upon your FEIE exclusion level. It can be a little tricky, but the two critical factors are the limit to the housing expenses that can be included, and the base housing amount. The maximum standard amount of qualified housing expenses that the IRS allows for the FHE and FHD is $39,000 (30% of the maximum FEIE). The base housing amount of $20,800 would then be subtracted from the maximum standard amount to calculate the taxpayer's exclusion amount for the year.

For example, if a taxpayer had $36,000 in qualified housing expenses in 2025, the calculation for the exclusion would work like this:

1. Identify the total qualified housing expenses: $36,000.

2. Subtract the base housing amount: $36,000-$20,800= $15,200. (The base housing amount is 16% the FEIE cap ($130,000 X .16=$20,800)).

3. Thus, the taxpayer would have a $15,200 housing exclusion.

However, if the taxpayer had $45,000 in qualified housing expenses, the maximum that they could include in the tax year could not exceed $39,000 before subtracting the base housing amount. This is because the maximum exclusion is 30% of $130,000, which equals $39,000 ($130,000 X .30=$39,000). Simply put, the most that someone could exclude for the majority of locations around the world in the 2025 tax year is $18,200.

It is important to note that there are several high-cost cities that the IRS identifies that are allowed to exceed the standard maximum.

The Foreign Housing Deduction

The Foreign Housing Deduction generally works the same way as the exclusion. Again, the primary difference is that the deduction is only available for income earned from self- employment, while the exclusion is for income earned from an employer. In short, you would simply apply the same math to figure out your deduction amount.

Like any tax issue, what was provided in this post are just the basics of navigating foreign housing expenses tax exclusions and deductions. Main and Barbour Tax & Business Solutions, LLC is here to help you navigate your tax issues. You can reach us here for a consultation.

The information in this article is for education and informational purposes only and does not constitute professional tax, legal, or financial advice. Because tax laws are complex and subject to change, it is always best to consult with a qualified tax professional regarding your specific situation.