The Foreign Housing Exclusion and Deduction for 2026: The Formula, the Limits, the High-Cost Cities

The foreign earned income exclusion gets the headlines. Its quieter sibling, the housing cost amount in 26 U.S.C. 911(c), can matter just as much for people in expensive cities. It lets a qualifying individual exclude, or in some cases deduct, part of what they spend on foreign housing.

The formula has three moving parts: what you spend, a floor you must exceed, and a ceiling that depends on where you live.

The formula

Section 911(c)(1) defines the housing cost amount as your housing expenses, up to a limit, minus a base housing amount. Both the base and the default limit are tied to the foreign earned income exclusion amount.

• Base housing amount: 16 percent of the exclusion amount, computed on a daily basis, times the number of qualifying days in the tax year.
• General limit on housing expenses: 30 percent of the exclusion amount, computed on a daily basis, times the number of qualifying days, unless a higher limit applies to your location.

For 2026, the exclusion amount is $132,900. Notice 2026-25 does the math for a full year: the base housing amount is $21,264 ($132,900 times 0.16), and the general limit on housing expenses is $39,870 ($132,900 times 0.30).

So for a full 2026 year in a city without an adjusted limit, the most housing cost amount you can claim is $39,870 minus $21,264, or $18,606.

Higher limits for high-cost locations

Section 911(c)(2)(B) lets Treasury adjust the 30 percent figure for geographic differences in housing costs. The IRS has published annual notices doing exactly that since the 2006 tax year. For 2026, the notice is Notice 2026-25, which supersedes Notice 2025-16.

Some examples from the 2026 table of full-year limits on housing expenses:

• Hong Kong: $114,300
• Geneva: $116,900
• Singapore: $86,700
• London: $68,600
• Tokyo City: $67,300
• Paris (with Garches, Sevres, Suresnes and Versailles): $73,600
• Dubai: $57,174
• Toronto: $62,700
• Mexico City: $47,900

The notice also gives daily limits for partial-year qualifiers. For anywhere not listed, the general $39,870 limit applies.

One useful wrinkle: Section 4 of Notice 2026-25 lets a qualified individual who incurred housing expenses in a listed location during 2025 apply the 2026 limit instead of the 2025 limit, if the 2026 limit is higher. The IRS says it expects future notices to offer the same look-back option.

What counts as a housing expense

Section 911(c)(3) defines housing expenses as the reasonable expenses paid or incurred for housing in a foreign country for you and, if they live with you, your spouse and dependents. It includes expenses attributable to the housing, such as utilities and insurance. It excludes interest and taxes of the kind deductible under sections 163 and 164. Expenses are not reasonable to the extent they are lavish or extravagant under the circumstances.

The Form 2555 instructions list what is in and out.

• Included: rent, utilities other than telephone charges, real and personal property insurance, nonrefundable fees paid to obtain a lease, rental of furniture and accessories, residential parking, household repairs, and the fair rental value of employer-provided housing that you have not excluded under another provision.
• Excluded: deductible interest and taxes, the cost of buying or improving a house, principal payments on a mortgage, depreciation, domestic labor, pay television, and buying furniture or accessories.

Notice what that means for homeowners abroad. If you buy your foreign home, your mortgage principal, mortgage interest and property taxes do not count. Utilities, insurance and repairs do. Renters usually get more out of this provision than owners.

Exclusion or deduction: it depends who pays

The housing cost amount can be an exclusion or a deduction depending on the source of the money.

• Employer-provided amounts are excluded under section 911(a)(2). Employer-provided amounts are any amounts paid or incurred on your behalf by your employer that are foreign earned income included in your gross income, including salary. That means most employees, not just those with a housing allowance, use the exclusion.
• Self-employed individuals without employer-provided amounts deduct the housing cost amount instead, under section 911(c)(4). The deduction is limited to foreign earned income in excess of the amount you excluded. Any amount disallowed by that limit can carry over one year only.

Section 911(d)(7) adds an overall cap: the foreign earned income exclusion plus the housing deduction cannot exceed your foreign earned income for the year.

A worked example for 2026

An employee of a U.S. company lives in London for all of 2026, qualifies under the bona fide residence test, earns $210,000 of foreign earned income and pays $75,000 in qualifying rent and utilities.

• Housing expenses: $75,000, limited to the London figure of $68,600.
• Minus the base housing amount: $21,264.
• Housing cost amount: $47,336, excluded as employer-provided because the salary is foreign earned income.
• Foreign earned income exclusion: up to $132,900.

Total excluded: $180,236. The remaining $29,764 of salary is taxable, subject to the stacking rule and potentially offset by U.K. tax under the foreign tax credit.

Note the order. Publication 54 says the foreign earned income exclusion cannot exceed the smaller of the annual maximum or your foreign earned income minus your foreign housing exclusion. Here, $210,000 minus $47,336 is $162,664, so the full $132,900 is still available.

Partial years

If you qualify for only part of the year, both the base amount and the limit are prorated by your qualifying days. Notice 2026-25 provides daily limits for listed locations, for example $187.95 per day for London and $313.15 per day for Hong Kong. The base housing amount for 2026 works out to $21,264 divided by 365, or about $58.26 per qualifying day.

So a person who qualifies for 120 days of 2026 in London has a housing expense limit of about $22,554 (120 times $187.95) and a base amount of about $6,991 (120 times $58.26). Only expenses incurred during the qualifying period count.

Partial years are common in the year you arrive and the year you leave. They are also the years when people are most distracted by the move itself. Keep the lease, the deposit receipts and the utility bills from those months in one folder. The arithmetic is easy once the paper is in front of you, and very hard to reconstruct two years later.

Second households and family

Normally only the home that bears the closest relationship to your tax home counts. Section 911(c)(3)(B) makes an exception: if you maintain a separate home outside the United States for your spouse and dependents because living conditions at your tax home are dangerous, unhealthful or otherwise adverse, the expenses of that second household count too.

Couples who both work abroad have their own rules. Publication 54 and the Form 2555 instructions address married couples with separate and shared households. If both spouses qualify, plan the allocation before filing.

Elect it, document it

If your employer provides housing directly, coordinate with payroll. Employer-paid rent is generally part of your compensation, and the Form 2555 instructions let you include the fair rental value of employer-provided housing that you have not excluded under another provision. Get the numbers from your employer in writing each year so the amounts on your return match the amounts your employer reports.

The housing exclusion is a separate election from the earned income exclusion. Under 26 CFR 1.911-7, each election is made separately on Form 2555, and each stays in effect until revoked. Keep leases, utility bills and proof of payment. Expenses must be paid or incurred during the period you qualify.

In an expensive city, the housing calculation can be worth tens of thousands of dollars a year. Do not leave it on the table. If you want the numbers checked, let's talk.