Foreign Housing Exclusion 2026: IRS Notice 2026-25 Limits
If you’re a U.S. citizen or resident earning income abroad, IRS Notice 2026-25 is the document you’ve been waiting for. The foreign housing exclusion 2026 adjusts the Section 911 housing cost cap for more than 400 high-cost international locations — from Sydney to Singapore, Dubai to Dublin — and the difference between the standard cap and the adjusted cap can be tens of thousands of dollars in deductible expenses. If you’re a qualified individual under Section 911, these numbers directly reduce your U.S. federal tax bill on foreign earned income. Let’s walk through how it works and what’s new for 2026. 🌏
How does the foreign housing exclusion 2026 actually work? 🤔
The foreign housing exclusion lets a qualified U.S. expat exclude (employees) or deduct (self-employed) reasonable housing costs that exceed a base amount tied to the foreign earned income exclusion (FEIE), subject to an upper cap that changes by location.
Under Section 911 of the Internal Revenue Code, a qualified individual — generally one who meets either the bona fide residence or physical presence test — can elect to exclude foreign earned income (up to $132,900 for 2026) and to exclude or deduct a housing cost amount from gross income. The housing cost amount is your total foreign housing expenses for the year minus a base amount, and it is itself limited by an upper cap.
For 2026, the math in the default case looks like this:
| Component | Formula | 2026 Amount |
|---|---|---|
| FEIE maximum | Statutory (inflation-adjusted) | $132,900 |
| Base housing amount | 16% × FEIE maximum | $21,264 |
| Default housing expense cap | 30% × FEIE maximum | $39,870 |
| Default max housing cost amount | Default cap − base amount | $18,606 |
In our Los Angeles CPA practice we see many globally-mobile professionals leave money on the table because they use the default $39,870 cap when their posted city actually qualifies for a much higher adjusted cap. If you relocated to Tokyo, Hong Kong, Geneva, Singapore, or Dubai, check Notice 2026-25 before filing — the adjustment can double or triple your deduction.
Which cities got the biggest foreign housing exclusion 2026 adjustments? 🏙️
The highest 2026 caps are in Hong Kong ($114,300), Bermuda ($90,000), Osaka-Kobe ($90,664), Luanda ($84,000), Geneva ($93,900 range) and Tokyo/Vancouver-tier metros, reflecting where rent and utilities most outpace U.S. averages.
The IRS publishes a country-by-country, city-by-city schedule of adjusted limitations each year. The 2026 table in Notice 2026-25 includes substantial increases and shifts relative to prior years. Below is a selection of the most-relocated-to locations among our expat clients:
| Country | Location | 2026 Annual Cap | Daily Cap |
|---|---|---|---|
| China | Hong Kong | $114,300 | $313.15 |
| Japan | Osaka-Kobe | $90,664 | $248.39 |
| Bermuda | Bermuda | $90,000 | $246.58 |
| Angola | Luanda | $84,000 | $230.14 |
| Japan | Gifu, Komaki, Nagoya | $74,300 | $203.56 |
| France | Paris region (Garches, Sevres, Versailles) | $73,600 | $201.64 |
| Canada | Vancouver | $73,400 | $201.10 |
| China | Beijing | $69,000 | $189.04 |
| India | Mumbai | $67,920 | $186.08 |
| Australia | Sydney | $65,600 | $179.73 |
| Italy | Milan | $73,200 | $200.55 |
| Canada | Toronto | $62,700 | $171.78 |
The full table in the official notice covers every adjusted location from Argentina to Vietnam. See the complete Section 3 schedule in the IRS Notice 2026-25 PDF for your exact city, and the IRS foreign housing exclusion page for background.
Which housing expenses actually count under Section 911? 🧾
Qualified housing expenses include rent, utilities (except phone), real and personal property insurance, occupancy taxes, nonrefundable security deposits, rental of furniture and accessories, repairs, residential parking, and rental value of employer-provided housing.
What doesn’t count: mortgage interest and real estate taxes claimed separately, capital expenses for improvements, purchased furniture, domestic labor (servants, housekeepers), costs for a second foreign household, depreciation on an owned home, pay-television subscriptions, and anything “lavish or extravagant under the circumstances.” Keep receipts — this is a high-audit area.
If you have self-employment income earned abroad, the housing cost amount is a deduction on Form 2555, not an exclusion — and it cannot exceed your foreign earned income minus the FEIE. The IRS carefully scrutinizes expats who claim both the full FEIE and a large housing deduction when their foreign earned income barely covers both. Don’t stretch the math.
Can the foreign housing exclusion 2026 be applied retroactively? 📅
Yes. Notice 2026-25 expressly allows qualified individuals to use the higher 2026 adjusted limitations for a 2025 taxable year in place of the amounts published for 2025 — but only if it is more favorable to the taxpayer.
This retroactive election is an important planning opportunity. If you filed 2025 early using last year’s caps and your city’s 2026 cap is higher, you may be able to file an amended 2025 return (Form 1040-X with Form 2555) to claim the bigger housing cost amount. Discuss with your tax advisor whether the refund potential justifies the amendment cost and audit exposure.
What’s the difference between the exclusion and the deduction? 🔍
Employees with foreign-source wages use the foreign housing exclusion — the housing cost amount is subtracted from gross income. Self-employed taxpayers instead use the foreign housing deduction, which reduces adjusted gross income but is limited by net self-employment earnings.
A common mistake is a dual-status year — you were an employee for part of 2026 and went independent for the other half. In that scenario, you may use the exclusion only against wages earned while employed, and the deduction against self-employment income earned afterward. Keep your payroll records and Schedule C income cleanly separated by date.
Practical Takeaways for U.S. Expats ✅
- Confirm you meet the bona fide residence or 330-day physical presence test for 2026 before claiming anything under Section 911.
- Pull your city’s adjusted cap from Notice 2026-25 before filing — don’t default to $39,870.
- Subtract the $21,264 base housing amount to compute your maximum excludable/deductible housing cost amount.
- Keep itemized receipts for rent, utilities, and occupancy taxes; the IRS denies unsubstantiated housing claims.
- Compare 2025 vs. 2026 caps for your location and consider amending 2025 if a higher 2026 cap applies.
