To claim the housing exclusion, a USA person must meet the Physical Presence Test or the Bona Fide Resident Test.

The following expenses qualify for the foreign housing exclusion:

• Rent, or the fair rental value of housing;
• Repairs;
• Utilities other than telephone;
• Real property and personal property insurance;
• Occupancy taxes;
• Nonrefundable security deposits or lease payments;
• Furniture rental;
• Residential parking fees;
• Tax equalization payments paid by the employer;
• Education expenses for dependent children.

Expenses which do not qualify include interest and taxes, the cost of buying property, domestic labor, purchased furniture, depreciation of property or improvements.

The US Treasury Department and Internal Revenue Service issued Notice 2006-87 in October 2006, which provided adjustments to the limitation on housing expenses for the purposes of section 911 of the Internal Revenue Code (Code) for specific locations, on the basis of geographic differences in housing costs relative to housing costs in the United States.

The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) made several changes to section 911, one of which effectively placed a limit on the amount of housing costs that could be taken into account under that section. TIPRA provided the Treasury Department with authority to adjust the new housing cost limitation based on geographic differences in housing costs relative to housing costs in the United States.

In the Notice, using the approach suggested in the legislative history to TIPRA, the Treasury exercised its authority to increase the housing cost limitation, setting forth new higher housing cost amounts for specific locations. The relief provided by the Notice is retroactive to the effective date of TIPRA.
 

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