The foreign housing exclusion applies to amounts that are considered to be provided by your employer to pay for your housing abroad. The housing deduction applies only to self-employment earnings.
Foreign Housing Exclusion
The amount you can take as a foreign housing exclusion is the total of your housing expenses for the year, minus a base amount, according to a U.S. Government scale for foreign assignments. This base amount is built into the calculation of your housing exclusion as a separate line on Form 2555, so you only need to calculate your total housing expenses. If you claim the housing exclusion, you cannot use Form 2555EZ.
Housing Expenses
Housing expenses include the reasonable costs of the following, during the period you qualify for the foreign earned income exclusion:
Rent, or the fair market value of housing provided by your employer
Repairs
Utilities
Insurance
Occupancy taxes
Non-refundable fees for obtaining a lease
Rental of furniture and accessories
Residential parking
Housing expenses do not include the following:
Cost of purchasing property
Deductible interest and taxes
Domestic labor (maids, gardeners)
Pay television subscriptions
Improvements or additions that increase the value of the property or prolong its life (capital expenditures)
Purchased furniture or accessories
Depreciation or amortization
If you do not have self-employment earnings, all your income is considered to have been provided by your employer, and you can exclude all your housing expenses, up to the limit for the foreign earned income and housing exclusion.
Foreign Housing Deduction
If all your foreign source income is from self-employment, you take the foreign housing deduction instead of the exclusion. You can deduct the same housing expenses as for the exclusion.
If you have self-employment earnings and income from an employer, you must allocate your housing expenses between the housing exclusion and the housing deduction. Your housing deduction cannot be more than your foreign earned income minus the total of your foreign earned income exclusion and your housing exclusion (up to the maximum). If you cannot deduct all your housing expenses because of this limit, you can carry over the excess to the following year only.