The Foreign Housing Exclusion (and Deduction), explained

The Foreign Housing Exclusion (and its self-employed sibling, the Foreign Housing Deduction) is the second half of Form 2555. If you qualify for the Foreign Earned Income Exclusion, you may also be able to exclude — or deduct, if self-employed — additional income spent on housing costs above a base amount.

For low-cost cities the benefit is modest. For high-cost cities like Hong Kong, Singapore, Geneva, Tokyo, and London, the housing exclusion can shelter another $30,000–$60,000 of income beyond the FEIE — meaningful money.

Most expats either don't know it exists or don't realize how generous the city-specific caps can be.

What it does

The Foreign Housing Exclusion lets you exclude the portion of your housing expenses that exceeds a base amount — that base being the IRS's notion of "what housing would have cost in the U.S. anyway." The exclusion is on top of the FEIE and works on the same Form 2555.

The calculation:

Foreign Housing Exclusion = qualified housing expenses − base amount

Where:

• Qualified housing expenses = the amount you actually spent on housing during the year (subject to a per-city cap).
• Base amount = 16% of the FEIE limit, prorated for days qualifying. For 2025, with a $130,000 FEIE cap, the base is $20,800 ($130,000 × 16%).

So if you spent $40,000 on qualifying housing in a city with a high enough cap to allow it: $40,000 − $20,800 = $19,200 excluded on top of FEIE.

The city-specific caps

The default cap on qualified housing expenses is 30% of the FEIE limit — about $39,000 for 2025. But the IRS publishes a long list of cities with higher caps reflecting actual costs there. For 2025 (these change annually — check the current Form 2555 instructions):

City	Cap on housing expenses	Effective exclusion (cap − base)
Hong Kong	~$114,300	~$93,500
Singapore	~$72,000	~$51,200
Tokyo	~$57,500	~$36,700
Geneva	~$104,400	~$83,600
Dubai	~$57,000	~$36,200
London	~$66,000	~$45,200
Paris	~$72,400	~$51,600
Sydney	~$57,800	~$37,000
Seoul	~$36,800	~$16,000
Mexico City	~$57,200	~$36,400
Most cities (default)	~$39,000	~$18,200

The exact numbers shift each year. The 2025 IRS table is in the Form 2555 instructions. If your city isn't listed, you use the default cap.

What counts as a qualifying housing expense

Yes:

• Rent for your primary foreign residence
• Utilities (except telephone) — electricity, water, gas, internet, trash
• Renters insurance
• Property insurance on housing you own
• Necessary repairs and maintenance
• Real and personal property taxes on a foreign rental
• Furniture and accessory rental (if rented separately)
• Residential parking fees
• Occupational taxes on your home
• Real-estate broker fees for finding a foreign rental

No:

• The cost of buying property (purchase price, mortgage principal)
• Mortgage interest and property taxes on owned housing (these get separate treatment as itemized deductions)
• Domestic labor (housekeepers, gardeners)
• Television subscriptions (the IRS draws this line oddly — internet yes, cable TV no)
• Improvements that materially increase the property's value
• Expenses that are "lavish or extravagant under the circumstances"
• Telephone service (cell or landline)

What about your spouse and family

If both spouses are U.S. taxpayers and both qualify for FEIE, only one spouse can claim the housing exclusion for a shared residence. You don't get to double it.

But if you and your spouse maintain separate foreign households (genuinely separate — different cities, not just different rooms), each can claim their own housing exclusion against their own income.

Most dual-income couples in one household just have the higher earner claim it.

Self-employed: Housing Deduction instead

If you're self-employed, you take the housing benefit as a deduction on Form 2555 Part IX, not an exclusion. Same calculation, same caps, but instead of reducing your income subject to tax, it's deducted from your self-employment earnings.

A critical distinction: the Housing Deduction reduces your income tax but not your self-employment (SE) tax. SE tax is calculated on net earnings before the housing deduction. So the housing benefit saves you income tax but not the 15.3% SE tax.

If you're partly employed and partly self-employed, you allocate the housing benefit between exclusion (for the employed portion) and deduction (for the self-employed portion).

The "lavish" test

The IRS reserves the right to disallow housing expenses that are "lavish or extravagant under the circumstances." There's no bright line, and the IRS rarely audits this — but the rule exists.

Practically: $5,000/month rent in central Hong Kong is not lavish. $50,000/month for a single executive in any city probably is. The city-specific caps mostly handle this — they implicitly tell you what the IRS considers reasonable.

When the housing exclusion isn't worth bothering

If your housing expenses are below the base amount (~$20,800 in 2025), there's no exclusion. You just fill out 2555 for the FEIE and skip the housing part.

Most expats in low-cost countries (Southeast Asia, much of Latin America, smaller cities anywhere) end up here. The FEIE alone covers them.

Worked example: Singapore, $200K salary

You're a U.S. citizen in Singapore on a $200,000 salary, paying $72,000/year on rent for a serviced apartment that includes utilities and insurance. Singapore has no income tax on foreign-source income for non-residents, but as a Singapore resident you face the local rates (much lower than the U.S.).

• FEIE exclusion: $130,000
• Housing expenses: $72,000 (capped at the Singapore cap of ~$72,000)
• Base amount: $20,800
• Housing exclusion: $72,000 − $20,800 = $51,200
• Total excluded: $130,000 + $51,200 = $181,200

Of your $200,000 salary, only $18,800 remains in U.S. taxable income before deductions.

Without the housing exclusion, you'd still owe U.S. tax on $70,000 above the FEIE cap. The housing exclusion alone is the difference between a substantial U.S. tax bill and almost none.

Common mistakes

• Forgetting the housing exclusion entirely. People claim FEIE and stop. If you have meaningful rent, run Part VI of Form 2555.
• Using the default cap when a city-specific cap applies. Hong Kong residents using the $39,000 default instead of the $114,300 city cap lose tens of thousands.
• Counting non-qualifying expenses. Domestic help, TV subscriptions, mortgage principal don't count.
• Claiming the housing exclusion against unqualified income. Like FEIE, the housing exclusion only shelters foreign earned income, not investment income.
• Misallocating between exclusion and deduction. If you have both salary and self-employment income, the allocation matters — and the SE tax effect changes the math.

Next steps

• The Foreign Earned Income Exclusion
• Physical Presence Test
• Bona Fide Residence Test
• FEIE vs. Foreign Tax Credit