The foreign housing exclusion lets a US taxpayer who qualifies for the foreign earned income exclusion (opens the official IRS page in a new tab) also exclude reasonable housing costs above a base amount, up to a limit that the IRS sets higher for London. Employees claim it as an exclusion and the self-employed as a deduction, both on Form 2555. In London, as elsewhere in the UK, the foreign tax credit often gives the better result, so the housing exclusion is something to compare rather than claim by default.
This post is for US citizens and green card holders renting in London who want to know what the housing exclusion covers and whether it is worth claiming. It goes deeper on one part of our guide to avoiding US-UK double taxation. We cover who qualifies, how the housing amount is worked out, which London costs count, the London limit, the exclusion against the deduction, a worked example and the choice against the credit.
Who can claim the foreign housing exclusion in London?
Only someone with a tax home in a foreign country who meets the bona fide residence test or the physical presence test, the same conditions as the main exclusion. Housing costs count only for the days in the qualifying period, and the claim is made on Form 2555 attached to the US return.
The housing exclusion is a separate election from the foreign earned income exclusion. Publication 54 (opens the official IRS page in a new tab) says the two are chosen separately and must be revoked separately, and the rules on making the main election apply to the housing election too. A person can therefore claim the housing exclusion without the main exclusion, although in practice the two are usually claimed together.
Qualifying is the first hurdle, and in the arrival year it often comes after the return is due. Our post on bona fide residence or physical presence explains the two tests, the tax home rule and the options while the qualifying period runs. The claim itself goes on Form 2555, alongside the main return on Form 1040.
How is the housing amount worked out?
The housing amount is your reasonable foreign housing expenses for the qualifying period, capped at a limit, minus a base housing amount. The base is a fixed share of the maximum foreign earned income exclusion for the year, and both the base and the limit are worked out per day of the qualifying period.
For tax year 2025 the maximum exclusion is $130,000, and Publication 54 (opens the official IRS page in a new tab) sets the base housing amount as a fixed percentage of it. The general limit on housing expenses is a larger percentage of the same figure. Both scale down for a qualifying period shorter than the full year, so a person who arrived in London part-way through the year has a smaller base and a smaller limit.
The result is that only the slice of housing cost between the base and the limit counts. Rent below the base gives no exclusion at all. Rent above the limit gives no more than the limit allows. Expenses must also be reasonable, and the Form 2555 instructions (opens the official IRS page in a new tab) exclude anything lavish or extravagant under the circumstances. A person who moved between locations during the year works out a separate limit for each and adds them.
- Add up qualifying housing expenses for the days you meet a test
- Cap the total at the limit for your location and qualifying days
- Subtract the base housing amount for the same days
- Split the result between employer-provided and self-employed earnings
Which London housing costs count as qualifying expenses?
Rent and the ordinary running costs of a rented home count. The Form 2555 instructions list rent, utilities other than telephone, property and contents insurance, nonrefundable lease fees, furniture rental, residential parking and repairs. Costs for a spouse and dependants living with you count too. Buying a home, mortgage principal and domestic help do not.
That list favours renters. A London homeowner's main costs are mortgage payments, and the principal is excluded outright, while deductible interest and taxes are left out of the housing calculation. Buying furniture is excluded, although renting it counts. Pay television and the cost of improving a property are excluded as well. The fair rental value of housing provided by an employer can count, unless it is already excluded under the separate rules for lodging on the employer's premises.
A second household can count in narrow circumstances: where a spouse and dependants live elsewhere because conditions at the tax home are dangerous, unhealthful or otherwise adverse. That rarely applies to London. Keep the tenancy agreement, utility bills and receipts, because the claim rests on actual expenses for the qualifying days.
- Counts: rent, utilities other than telephone and residential parking
- Counts: property and contents insurance, nonrefundable lease fees and repairs
- Counts: furniture rental and the fair rental value of employer housing
- Does not count: buying or improving a home, mortgage principal or depreciation
- Does not count: deductible interest and taxes
- Does not count: domestic help, pay television or buying furniture
Why is the housing limit higher in London?
Because the IRS publishes an annual notice that raises the limit for high-cost locations, and London is among them. The Form 2555 instructions tell a filer to use the notice's figure for a listed location instead of the general limit, so a London renter can count more housing cost than someone elsewhere.
For 2025 the instructions point to Notice 2025-16. The notice for 2026, published in the Internal Revenue Bulletin, lists London and several other UK locations, including Surrey, Reading, Bath and Cheltenham, with a catch-all row for other UK cities and some named exceptions. The figures change every year, so we take them from the current notice rather than from memory.
The notices also offer an election. Where the next year's figure for a location is higher than the current year's, a qualified individual can generally apply the higher figure to the earlier year. The Form 2555 instructions (opens the official IRS page in a new tab) refer to that election, and it is worth checking each year for a London renter whose costs exceed the published limit.
Should an employee or a freelancer claim the exclusion or the deduction?
That depends on how the housing is paid for. The exclusion applies to housing paid with employer-provided amounts, and the deduction to housing paid with self-employment earnings. An employee of a UK company uses the exclusion, a self-employed consultant uses the deduction, and someone with both splits the housing amount between them.
Employer-provided amounts are wider than people expect. Publication 54 (opens the official IRS page in a new tab) includes salary, housing reimbursements and amounts an employer pays to a landlord on your behalf. So an employee who pays rent from an ordinary London salary, with no housing allowance at all, has employer-provided amounts and can use the exclusion. The exclusion is figured before the foreign earned income exclusion, which is then capped at foreign earned income minus the housing exclusion.
The deduction is narrower. It is limited to foreign earned income minus both exclusions, and any excess carries to the next year only. Where a married couple share a London home, only one spouse can claim, though that spouse may include both spouses' expenses within the limit. Our individual tax returns service sorts out which spouse claims and how a mixed income is split.
How does it work for a US citizen renting in Islington?
Take a US citizen employed in London by a UK bank, renting a flat in Islington from her salary and qualifying under the physical presence test. Her rent, utilities, insurance and residential parking are qualifying expenses. The amount above the base, up to the London limit, is her housing amount.
Because she is an employee, the whole housing amount is treated as paid with employer-provided amounts, and she can exclude it. She works out the housing exclusion first, then the main exclusion on what remains of her foreign earned income. If her salary is above the main exclusion limit, the housing exclusion can shelter part of the excess, which is why the housing election appeals to higher earners in London.
The cost appears on the other side. UK tax attributable to the excluded salary and the excluded housing amount cannot be credited, and her remaining income is taxed at the higher rates that apply as if the excluded amounts were still there. Her UK PAYE tax on the same salary may already cover the US tax on it under the foreign tax credit (opens the official IRS page in a new tab), with the surplus carried back one year and forward ten.
Is the housing exclusion worth claiming against the foreign tax credit?
Often not, for someone paying full UK income tax. UK rates on earnings are generally higher than US rates, so the foreign tax credit on Form 1116 usually brings US tax on a London salary to nil without any exclusion, and it keeps excess UK tax available as a carryover. The housing exclusion can still help in specific cases.
Claiming either exclusion closes off other reliefs. UK tax on excluded amounts is lost for credit purposes, and anyone claiming the foreign earned income exclusion, the housing exclusion or the housing deduction cannot take the additional child tax credit. Our post on the foreign tax credit or the exclusion in the UK compares the two on Form 1116 using the categories set out in the Form 1116 instructions (opens the official IRS page in a new tab).
The election also binds future years until revoked, and a revoked election cannot generally be made again for the next five tax years without IRS approval. Each election is revoked separately, as our post on revoking the foreign earned income exclusion explains. Our tax planning service models both routes before the first London return, and the wider reliefs are in our guide to US-UK double taxation.
General information, not advice. The right answer depends on your circumstances and the tax year concerned.
