Foreign Housing Deduction and Exclusion

Foreign Housing Deduction and Exclusion

Living overseas you can deduct or exclude my foreign housing costs

But only if you meet certain conditions. The foreign housing exclusion and deduction are in addition to the foreign earned income exclusion. You can claim the exclusion or deduction from you gross income but you must make the election if you qualify.

The requirements to exclude foreign housing costs.

To qualify for the foreign housing deduction or exclusion you must

  1.  Be a US Citizen or resident alien and
  2.  Have foreign earned income and
  3.  Your tax home is in a foreign country and
  4.  You meet either the bona fide residence test or the physical presence test and
  5.  Applies only to amounts consider incurred or paid for with employer-provided amounts.

The requirements to deduct foreign housing costs.

  1. Be a US Citizen or resident alien and
  2. Have foreign earned income and
  3. Your tax home is in a foreign country and
  4. You meet either the bona fide residence test or the physical presence test and
  5. Applies only to amounts paid for with self-employment earnings.

Foreign housing costs qualify for the exclusion and deduction.

Qualified housing expenses include any reasonable expenses you have paid for or incurred for housing in a foreign country for you and (if they live with you) for your spouse and dependents. You can only take into consideration those housing expenses for the part of the year that you qualify for the foreign earned income exclusion.

  • Rent
  • The fair rental value of housing provided in kind by your employer
  • Repairs
  • Utilities (other than telephone charges)
  • Real and personal property insurance
  • Nondeductible occupancy taxes
  • Nonrefundable fees for securing a leasehold
  • Rental of furniture and accessories
  • Residential parking

Foreign housing costs that do not qualify for the exclusion and deduction.

  • Expenses that are lavish or extravagant under the circumstances
  • Deductible interest and taxes (including deductible interest and taxes of a    tenant-stockholder in a cooperative housing corporation)
  • The cost of buying property, including principal payments on a mortgage
  • The cost of domestic labor (maids, gardeners, etc.)
  • Pay television subscriptions
  • Improvements and other expenses that increase the value or appreciably    prolong the life of property
  • Purchased furniture or accessories
  • Depreciation or amortization of property or improvements

Limitations on foreign housing costs.

The housing cost amount is considered your total allowable foreign housing expenses minus the base housing amount. The calculation to arrive at the amount you can deduct or exclude from your income involves 3 steps.

Step 1 – Calculate your base housing amount. Your base housing amount is 16% of the maximum foreign earned income exclusion for the tax year. If you qualify for the foreign earned income exclusion for part of the year, you must multiply the daily rate times the number of days you qualify for the foreign earned income exclusion. The base housing amount is the amount you cannot exclude. Consider this amount to be the typical amount you would have spent on housing if you were living in the US

Step 2 – Determine your limit on housing expenses. Housing expenses are generally limited to 30% of the maximum foreign earned income exclusion for the tax year. However, if you live in an area that is deemed to be a high-cost area, your exclusion will be higher.

Step 3 – Subtract your base housing amount from you eligible housing expenses.

An important note in regards to taking the foreign housing credit or deduction; your foreign earned income will be reduced by Your Foreign Housing Exclusion. You must subtract Your Foreign Housing Exclusion from your foreign earned income.

If housing expenses exceed the housing limit you can carryover any unused amounts.

You can only carry over to the next year any part of your housing deduction that is not allowed because of the limit. This means it is only available to self-employed individuals and they are only allowed to carry over your excess housing deduction to the next year. If they cannot deduct it in the next year, the excess amount cannot carry over to any other year.

You must use tax Form 2555 to claim the foreign housing exclusion. The Form 2555-EZ cannot be used.

Both spouses can claim the foreign housing exclusion or deduction.

  1. If you and your spouse live in the same foreign household and file a joint return, the housing amounts must be calculated together. If you file married filing separate, only one spouse can claim the exclusion or deduction. Either spouse can claim the deduction or exclusion in both cases. However, if you and your spouse have different periods of residence or presence and the one with the shorter period of residence or presence claims the exclusion or deduction, you can claim as housing expenses only the expenses for that shorter period.
  2. If you and your spouse live apart and maintain separate households, you both may be able to claim the foreign housing exclusion or the foreign housing deduction. You both can claim the exclusion or the deduction if the two following conditions are met.

  • You and your spouse have different tax homes that are not within reasonable commuting distance of each other.
  • Neither spouse's residence is within reasonable commuting distance of the other spo


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