London rent on a US return: how the foreign housing exclusion actually works

Figures relate to tax year 2025 (US)

You pay £3,200 a month for a flat in Clapham. Your US return already claims the foreign earned income exclusion, and your salary runs past the limit anyway. The housing exclusion is the part of Form 2555 that can still help. Most returns we review leave it empty.

It is not automatic, and it is not the whole rent. So this guide covers which costs qualify and how the base amount cuts the claim. It also covers why a London address changes the ceiling.

Key takeaways

• The housing exclusion sits alongside the earned income exclusion, not instead of it.
• Only the amount above a base figure counts, and that base rises with the earned income limit.
• A general cap applies, but London carries a higher ceiling on the IRS high-cost list.
• Rent, utilities and renters insurance qualify; mortgage payments and furniture purchases do not.
• Employees exclude the amount, while the self-employed deduct it instead.
• The claim is pro-rated for part-years, which catches people in their arrival and departure years.

What is the foreign housing exclusion?

It is a second exclusion on Form 2555 for the cost of housing abroad. You add up qualified housing expenses and subtract a base amount set by law. What remains is excluded, up to a ceiling. The result comes off your taxable income after the earned income exclusion has already been applied.

The logic is simple enough. Congress accepted that living abroad costs more. So it exempted the excess above ordinary domestic spending. The base amount represents that ordinary domestic cost.

Which costs count, and which do not?

Rent is the big one, and it usually carries the claim on its own. Utilities other than telephone count, as do renters insurance, parking, and fees paid to secure a lease. Purchases of furniture, mortgage capital and anything that improves a property you own all fall outside.

• Rent actually paid for your foreign home, including a reasonable amount for a second home in limited cases.
• Utilities such as gas, electricity and water, but not telephone or broadband.
• Renters insurance, residential parking and occupancy taxes paid to a local authority.
• Letting agency fees and the cost of furniture rental, where the furniture stays rented.
• Repairs you pay for as a tenant, though not improvements to a property you own.

Council tax is the question we field most often. It behaves like an occupancy tax. In our practice we treat it as qualifying where the tenant pays it directly. Keep the bills, because the split between qualifying and non-qualifying items is the part an examiner would test.

How the base amount cuts the claim

The base equals 16% of the earned income exclusion limit for that year. With that limit at $130,000 for 2025, the base lands near $20,800. Nothing below that figure counts toward the housing exclusion at all.

The ceiling works the same way, as a percentage of the same limit. The general cap is 30%, which leaves a maximum claim of roughly $18,200 in most locations. London is not most locations, and the IRS publishes a separate table for cities where housing costs far more.

Why London changes the numbers

According to the IRS guidance published each year, a list of high-cost locations carries its own limits. London appears on that list with a ceiling well above the general figure. That gap is what makes the claim worth building properly.

The high-cost figures move annually, so last year's number is a guide rather than an answer. Check the limit for the year you are filing. Then check whether the whole year qualifies, or only part of it.

The list comes from cost surveys, not from your own tenancy. So the ceiling never adjusts for the flat you chose. Two colleagues in the same building face the same maximum, whatever each of them pays their landlord.

Other British cities rarely appear. A tenant in Leeds paying £1,400 a month may find the base amount swallows the entire claim. That is a normal outcome rather than a mistake.

Check the table even so. Cities move on and off the list as survey data changes, and a location that missed out one year can appear the next.

What about a second home, or a family left behind?

A second foreign household qualifies only in narrow circumstances. The rules can allow a second qualifying home. Conditions at your workplace must be dangerous or unhealthful, and your family must live elsewhere abroad. Most London postings fall well short of that test, so the claim rests on one household.

A family home back in America never qualifies. The relief covers foreign housing only. A mortgage in Denver stays outside the calculation, however much of your income it swallows.

A worked example

The figures below are illustrative. Take an example. An American employee in London pays £3,200 a month in rent. Utilities run to £180 a month, and council tax to £1,900 for the year.

That comes to roughly £40,300 for the year. Converted at a rate near 1.27, the qualified expenses land close to $51,200. Subtracting the base of about $20,800 leaves roughly $30,400.

Under the general cap that claim would stop near $18,200. Under the London figure it can run higher. The difference between the right table and the wrong one is worth thousands of dollars.

Employees and the self-employed take different routes

An employee excludes the housing amount, which means it never enters taxable income. A self-employed person deducts it instead, and the deduction is limited to foreign earned income after other exclusions. The arithmetic looks similar and the placement differs.

Partners in a firm sit with the self-employed here. The deduction reduces income subject to US tax. It leaves self-employment earnings alone, so the social security position stays put. Where a totalization certificate already removes that charge, the point is academic.

That difference matters for contractors. Our guide to the foreign earned income exclusion sets out how the two interact. It also covers the order they apply in.

How do you claim the housing exclusion?

Through Part VI of Form 2555, filed with your return for the year. The qualifying test matches the one for earned income. You pass it by bona fide residence, or by counting days under the presence rules. The housing figure then flows through to the exclusion total.

1. Confirm you qualify for the year, whether by bona fide residence or by day counting.
2. Total the qualifying costs actually paid, using the dates payment left your account.
3. Convert each amount into dollars, using a consistent and documented exchange rate approach.
4. Subtract the base amount for the year, pro-rated for any days that do not qualify.
5. Apply the London ceiling if your home sits there, or the general ceiling if it does not.
6. Enter the result in Part VI of Form 2555 and carry it through to your return.
7. Keep the tenancy agreement, the bills and the conversion workings with your tax papers.

Does the housing exclusion always beat the foreign tax credit?

No, and the answer turns on your whole position rather than the housing alone. Excluded income cannot generate foreign tax credits, so claiming both exclusions can leave credits stranded. For a high earner paying substantial UK tax, credits often produce a better result on their own.

Switching between methods carries its own cost. Revoking the exclusion locks you out for five years without permission from the IRS. So the choice deserves modeling rather than instinct.

We run both computations in a client's first year abroad. Then we keep the decision under review as salary and UK tax change. Our guide to US secondments covers the employer side of the same question.

What happens in the year you arrive or leave?

Both the base amount and the ceiling get pro-rated for the days you qualify. Arrive in September and roughly a third of the year counts. A third of the base then applies against a third of the ceiling. The rent you paid before qualifying never enters the calculation.

The pro-rating counts qualifying days rather than days in the flat. So a long trip home can shrink the claim, even though the rent kept running. Track the travel calendar alongside the rent, because those two numbers rarely tell the same story.

Departure years work the same way in reverse. Expect a smaller claim than the rent alone suggests, and expect the pro-rating to surprise anyone who moved mid-month.

Keep the dates tidy. A tenancy that starts mid-month and a qualifying period that starts a week later produce two different figures, and only one of them is right.

How does an employer's help affect the claim?

Housing allowances, relocation help and rent paid straight to a landlord all count as income to you first. The same spending can then support a housing exclusion, provided the cost was genuinely yours. The order matters: income in, qualified expense out, and never one without the other.

Some employers gross the benefit up to cover the tax. That gross-up is pay in its own right, so it raises both your income and usually your qualifying costs. Ask payroll for a breakdown rather than working from a net figure on a payslip.

Watch the timing as well. A deposit paid in one year and returned in another is not a housing cost. An agency fee deducted from it can be.

Mistakes and penalties we see with housing claims

• Claiming the full rent without subtracting the base amount, which overstates every figure below it.
• Using the general ceiling for a London flat, which quietly gives away thousands of dollars.
• Including mortgage payments on a property you own, which never qualified.
• Forgetting to pro-rate the base and ceiling in an arrival or departure year.
• Claiming housing paid by an employer without reporting the same amount as income.
• Mixing conversion rates across the year so the total cannot be reconciled to the bank statements.

Penalties here are accuracy-related rather than dramatic. But an overstated exclusion cuts tax that was genuinely due. Interest then runs from the original due date once the figure is corrected.

In our practice the most expensive error is the quiet one. A correctly prepared Form 2555, Part VI left blank, repeated across several years.

How US UK Tax Accountants helps

We build the claim from the tenancy and the bank statements. A rent figure quoted in an email is not enough. Then we compare the exclusion route against the credit route for your actual numbers.

Renting in London and filing in America? Get in touch with your lease. We will price the difference alongside your US federal returns.

Last reviewed 20 September 2026. This article is general information and not personal tax advice. The base amount and the high-cost limits change every year, so check the figures for your own filing year.