Foreign Housing Exclusion and Deduction

If you live and work outside the United States, you can exclude amounts paid by your employer for housing. This includes any amounts paid directly to you or on your behalf for housing, rent, education for your children, or tax equalization ("gross up" payments).

Time Requirements

For the housing exclusion, you must meet the same time requirements under the bona fide or physical presence tests.

Qualifying Expenses

The following expenses qualify for the foreign housing exclusion:

• Rent,
• Fair rental value of housing provided by your employer,
• Repairs,
• Utilities other than telephone,
• Real property and personal property insurance (homeowners & renters insurance),
• Occupancy taxes,
• Nonrefundable security deposits or lease payments,
• Furniture rental,
• Residential parking fees,
• Tax equalization payments paid by your employer,
• Education expenses for your dependent children.

Non-Qualifying Expenses

The following expenses do not qualify for the foreign housing exclusion:

• Lavish or extravagant expenses (as determined by your circumstances),
• Deductible interest and taxes (for example mortgage interest),
• Cost of buying property (for example, principal payments on a mortgage),
• Domestic labor (for example, maids and gardeners),
• Pay television,
• Home improvements,
• Purchased furniture,
• Depreciation of property or improvements.

Coordination with the Income Exclusion

You can claim the income exclusion, the housing exclusion, or both. However, you cannot exclude the same income twice. Generally, you will calculate any housing exclusion if you have taxable foreign income left over after taking the maximum allowable income exclusion.

Calculating the Maximum Housing Exclusion

The maximum housing exclusion is calculated as follows.

Add up all the housing expense amounts. Subtract any amounts already excluded under the foreign income exclusion or claimed as a moving expense deduction. Subtract any housing allowance provided by the US Government. From the remaining housing expenses, you must subtract a base amount equal to 16% of a Federal GS-14 Step 1 salary. For 2005, this base amount is equal to $12,191 annually, or $33.40 per day. Multiply this base amount times the number of days in your qualifying period. Any housing expenses in excess of this base amount are excluded.

Because of the limitations in the housing exclusion, it is best to maximize your income exclusion first before calculating any housing exclusion.

Independent contractors cannot claim the foreign housing exclusion. Instead, they must claim the foreign housing deduction.