Introduction
You moved to Sydney or Melbourne for work, but the IRS still expects a return every year. Rent in those cities often runs well above what you budgeted, and U.S. tax filing doesn't pause because you changed hemispheres.
The foreign housing exclusion and the foreign housing deduction can lower your U.S. federal taxable income if you meet the IRS tests. You calculate both on Form 2555, alongside the Foreign Earned Income Exclusion (FEIE).
This guide covers who qualifies, which Australian housing costs count, how the 2026 maths works, and where people go wrong.
Key Takeaways
- Eligibility requires foreign earned income, a foreign tax home, and a residence or presence test.
- Only qualifying housing costs count, after subtracting the base amount of $21,264 for 2026.
- Employees use the exclusion; self-employed taxpayers use the deduction.
- Australian residency and Australian tax obligations stay separate from Form 2555.
What Is the Foreign Housing Exclusion and How Does Form 2555 Work?
The foreign housing exclusion removes qualifying housing costs from income when your employer provides the money. Under IRC section 911, the exclusion covers the housing cost amount attributable to employer-provided amounts. Those include salary, taxable in-kind benefits, and rent an employer pays your landlord.
Exclusion vs. Deduction
- Employees: claim the housing exclusion in Part VI of Form 2555.
- Self-employed: claim the housing deduction in Part IX, limited to foreign earned income left after the exclusions.
- Mixed income: you may claim both, allocating the employer-provided share.
The 2025 Form 2555 is the current version for filing. The 2026 draft is not for filing, so confirm you have the right revision before you prepare a return. Line numbers can differ between drafts and final releases, so match them to the instructions for the tax year you file.
How It Interacts With the FEIE
The housing exclusion is calculated first. The Foreign Earned Income Exclusion (FEIE) then applies to remaining foreign earned income. You cannot voluntarily shrink the housing exclusion to enlarge the FEIE.
Form 2555 vs. Form 1116
Form 2555 claims the FEIE and housing relief. Form 1116 generally claims the Foreign Tax Credit. You can't claim a credit or deduction for foreign tax on income you've already excluded.
Those are U.S. filing choices only. Australian tax residency, deductions and treaty positions need their own analysis; U.S. rules do not decide them.
Who Can Claim It While Living in Australia?
You need three things:
- Foreign earned income, meaning pay for services performed abroad. Investment, pension and other passive income don't count.
- A tax home in a foreign country.
- Either the bona fide residence test or the physical presence test.
The Two Residence Routes
- Bona fide residence: uninterrupted foreign residence that includes an entire tax year. Living abroad for one year doesn't automatically qualify.
- Physical presence: 330 full days in foreign countries during any 12 consecutive months. The days needn't be consecutive.
Tax Home and Abode
Your tax home is generally your principal place of work, regardless of where your family lives. It must be foreign. A U.S. abode, judged by family, economic and personal ties, generally blocks a foreign tax home.
A work visa, Australian tax residency or an Australian lease does not by itself establish eligibility. Those facts help, but the section 911 tests stand separately.
Situations That Need Care
- Mid-year move: count only qualifying days within 2026.
- U.S. government pay: not foreign earned income.
- Employer-provided accommodation: taxable housing may count, but lodging excluded under section 119 generally can't be counted again.
- Wages plus self-employment: allocate between the exclusion and the deduction.
Which Australian Housing Expenses Qualify, and What Limits Apply?
Qualifying Costs
- Reasonable rent for your principal foreign home
- Utilities, except telephone
- Real or personal property insurance
- Nonrefundable fees for obtaining a lease
- Rented furniture and accessories
- Residential parking
- Household repairs
Nonqualifying Costs
- Mortgage principal, deductible interest and taxes
- Home purchases and improvements
- Furniture bought outright
- Domestic labour
- Pay television
- Meals, and lavish or extravagant expenses
Limits for 2026
Housing costs are capped before you subtract the base amount. The cap is not the exclusion itself. The standard expense limit is $39,870, and Notice 2026-25 lists higher limits for some Australian cities. Partial years are prorated by qualifying days.
How to Calculate the Foreign Housing Exclusion for 2026
The Sequence
- Total your qualifying housing expenses.
- Take the smaller of those expenses or your location's limit.
- Subtract the base housing amount (not below zero).
- Apply employer allocation and the foreign earned income limit.
2026 Figures
| Item | Annual | Daily |
|---|---|---|
| FEIE maximum | $132,900 | n/a |
| Base housing amount (16%) | $21,264 | $58.26 |
| Standard expense limit (30%) | $39,870 | $109.23 |
| Melbourne limit | $40,600 | $111.23 |
| Sydney limit | $65,600 | $179.73 |
| Wollongong limit | $46,000 | $123.06 |
Canberra, Brisbane and Perth aren't listed, so the standard limit applies. Wollongong's published annual and daily figures do not match, so confirm both amounts on the IRS housing-limit notice before you rely on either.
Full-Year Example (Sydney)
Assume qualifying costs of $48,000 for rent, utilities and insurance, all employer-funded.
- Smaller of expenses or limit: $48,000 (below the $65,600 cap)
- Less base amount: $21,264
- Housing amount: $26,736
Had the costs been $70,000, the $65,600 cap would apply first. Any remaining foreign earned income may still qualify for the FEIE.
Mid-Year Example (Melbourne)
You arrive and qualify for 200 days in 2026, with $30,000 in qualifying costs for that period.
- Daily cap: $111.23 × 200 = $22,246
- Base: $58.26 × 200 = $11,652
- Smaller of costs or cap: $22,246
- Housing amount: $22,246 − $11,652 = $10,594
If you move between locations, complete the limit worksheet for each location and add the results.
Converting Australian Dollars
Report housing expenses in U.S. dollars. Use the exchange rate in effect when you pay or accrue each expense.
The IRS has no official rate, but it accepts a posted rate applied consistently. An annual average may suit income received evenly when rates are stable; that is not blanket permission for every housing payment. Keep a record of your rate source.
How to Claim the Benefit on Form 2555
Document Checklist
- Lease and rent receipts or bank records
- Utility and insurance statements
- Parking and lease-fee records
- Employer housing documentation
- Dates of work locations and travel records
- Foreign earned income records
- Your exchange-rate source and method
The IRS expects you to keep supporting records for as long as they may matter, generally through the limitations period.
Working Through the Form
- Enter taxpayer, income and residence-test details.
- Compute housing expenses and the location limit.
- Subtract the base amount to reach the housing amount.
- Employees take the exclusion; self-employed taxpayers take the deduction.
Confirm part and line numbers against the final form for your year before filing.
Attaching to Form 1040
Form 2555 is never filed alone. Attach it to your Form 1040 or 1040-SR, or to Form 1040-X when amending. Form 1116 doesn't substitute for it.
Couples and Shared Housing
- Each qualifying spouse computes the FEIE separately on their own Form 2555.
- On a joint return, the housing computation can be joint or separate.
- In a joint computation, one spouse claims, expenses are combined, and that spouse's base is subtracted.
- Separate households are computed separately; both spouses can claim only if the commuting-distance conditions are met.
- Never count the same expense twice.
Common Mistakes and When to Get Help
These Form 2555 errors come up often:
- Using a prior-year FEIE or city limit
- Treating the cap as the automatic exclusion
- Skipping proration in a partial year
- Including nonqualifying costs
- Overlooking the tax-home test
- Confusing the employee exclusion with the self-employed deduction
Foreign Tax Credit and Other Filings
No credit or deduction is allowed for foreign tax on excluded income. If part of your wages is excluded, remove the taxes attributable to that part. State taxes and Australian consequences need separate review, since some states don't follow federal treaty treatment.
The U.S.-Australia treaty doesn't remove citizenship-based taxation either. Its saving clause lets the U.S. tax its citizens.
Getting Help
VJM Global's cross-border tax professionals support expatriate employees with compliance and advisory work. For U.S. and Australian clients, that can mean organising records, reviewing Form 2555 calculations and coordinating wider compliance questions. Support centres on accurate compliance and correct calculations, since outcomes depend on each client's facts.
If you left the benefit off earlier returns, have a qualified professional review amended-return or voluntary-compliance options first. Election timing matters, and re-electing after revocation within five tax years needs IRS approval.
Frequently Asked Questions
What is the foreign housing exclusion limit for 2026?
The standard expense limit is $39,870, with higher limits for Sydney ($65,600), Melbourne ($40,600) and Wollongong ($46,000). The limit is only one step; subtract the $21,264 base amount for the final figure.
Can I claim the foreign housing exclusion or deduction on my taxes?
You need foreign earned income, a foreign tax home, and either the bona fide residence or physical presence test. Employees claim the exclusion and self-employed taxpayers the deduction, both on Form 2555.
What are the IRS rules for housing allowance?
Taxable employer-paid housing or allowances can support the exclusion. Lodging excluded under section 119 generally can't be counted again, so analyse the allowance alongside your income.
What rental expenses can be deducted?
Reasonable rent, utilities except telephone, insurance, lease fees, rented furniture, parking and repairs. Mortgage costs, purchased furniture and domestic labour don't qualify.
Who is exempt from filing Form 1116?
Form 1116 relates to the Foreign Tax Credit, not the housing exclusion. Individuals can skip it only if all foreign-source income is passive, reported on payee statements, and foreign taxes are $300 or less ($600 joint).
What is a foreign-earned exclusion?
The FEIE excludes qualifying foreign earned income, up to $132,900 for 2026. It is separate from the housing exclusion, though you calculate both on Form 2555.
