Foreign housing exclusion
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The foreign housing exclusion goes hand-in-hand with the foreign earned income exclusion. According to section 911(a) of the federal tax code, a qualified individual under either the bona fide residence test or the physical presence test will be able to exclude from the gross income the housing amount in a foreign country provided for by the employer. Note that "provided for by the employer" does not require that the employer actually procure the housing. If housing is paid from wages paid by the employer, this will meet the test. However, housing expenses in excess of the wages or earnings from self-employment would not qualify.
The tax code defines the "housing amount" as the total of all qualified housing expenses less the "base housing amount." It is important to define what is considered qualified housing expenses as well as what the IRS means by the base housing amount.
In order to qualify, housing expenses must be reasonable expenses incurred by the expatriate or their spouse and dependents if they live together in a foreign country. An exception to this rule would be if a second foreign household is maintained for the spouse and dependents due certain adverse and unhealthful conditions such as warfare or civil unrest. As a result, qualified housing expenses for both the first and second foreign home would include the following:
- The fair rental value of housing provided by employer
- Utilities (except for telephone charges)
- Rent
- Repairs
- Real and personal property insurance
- Nonrefundable fees for securing a leasehold
- Nondeductible occupancy taxes
- Residential parking
- Rental of furniture and accessories
Outside of the above list, any other housing expenses are not considered qualified. In addition, the value of meals or lodging that is excluded from gross income will not be excludable for foreign housing exclusion purposes as this would be considered a double benefit. For example, it would not include:
- Buying property
- Labor
- TV or Cable Bills
- Furniture
- Improvements that increase the value of the property
Keep in mind that you cannot include any expenses that you have excluded from gross income, there is no double benefit, in short. There is also a limit on the amount of housing expenses one can incur, usually around 30% of the FEI exclusion times the number of days in the qualifying period, usually about $27,450 a year. You can sometimes get more than this standard limit if you live in a high-cost locality, these limits can be found on Form 2555.
Second foreign household
If you have 2 foreign households, because your family cannot live near your work because of dangerous or unhealthful conditions, you may qualify for including the expenses of the second household. This can also include adverse living conditions including war, or if you need to live on a construction site or drilling rig.
Foreign Housing Deduction
If you are not self-employed, even partially, you cannot take a housing deduction, although you may be eligible for exclusion, as mentioned earlier. If you are considered self-employed, then you can deduct the housing amount on line 36 of form 1040 and form 2555. If you are both employed and self-employed, you can deduct part of your housing amount and also exclude a portion of it.
Couples
Determining a couples tax obligations matters if they are living together or separately.