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 of $13,184 annually. Housing expenses in excess of this base amount are excluded up to a maximum housing exclusion of $11,536. Together the $13,184 base amount and the $11,536 exclusion amount add up to the annual hosing expense allowance of $24,720.
Due to the high cost of living in some cities, the Treasury Department and the Internal Revenue Service are allowing higher foreign housing exclusions. See Notice 2006-87, Determination of Housing Cost Amount Eligible for Exclusion or Deduction. The IRS has expanded the list of cities eligible for higher housing exclusions, and revised the dollar limits for a handful of locations in Notice 2007-25.
Because of the limitations in the housing exclusion, it is best to maximize your foreign earned income exclusion first before calculating any foreign housing exclusion.
Independent contractors cannot claim the foreign housing exclusion. Instead, they must claim the foreign housing deduction.
More Information:
Foreign Earned Income Exclusion: Overview
Bona Fide Residence Test & Physical Presence Test
Maximum Exclusion & Prorated Exclusion
Self-Employment & Foreign Exclusions
