[Code of Federal Regulations]
[Title 26, Volume 10]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.911-4]

[Page 18-22]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.911-4  Determination of housing cost amount eligible for exclusion 
or deduction.

    (a) Definition of housing cost amount. The term ``housing cost 
amount'' means an amount equal to the reasonable expenses paid or 
incurred (as defined in section 7701(a)(25)) during the taxable year by 
or on behalf of the individual attributable to housing in a

[[Page 19]]

foreign country for the individual and any spouse or dependents who 
reside with the individual (or live in a second foreign household 
described in paragraph (b)(5) of this section) less the base housing 
amount as defined in paragraph (c) of this section. The housing cost 
amount must be reduced by the amount of any military or section 912 
allowance or similar allowance excludable from gross income that is 
intended to compensate the individual or the individual's spouse in 
whole or in part for the expenses of housing during the same period for 
which the individual claims a housing cost amount exclusion or 
deduction.
    (b) Housing expenses--(1) Included expenses. For purposes of 
paragraph (a) of this section, housing expenses include rent, the fair 
rental value of housing provided in kind by the employer, utilities 
(other than telephone charges), real and personal property insurance, 
occupancy taxes not described in paragraph (b)(2)(v) of this section, 
nonrefundable fees paid for securing a leasehold, rental of furniture 
and accessories, household repairs, and residential parking.
    (2) Excluded expenses. Housing expenses do not include:
    (i) The cost of house purchase, improvements, and other costs that 
are capital expenditures;
    (ii) The cost of purchased furniture or accessories or domestic 
labor (maids, gardeners, etc.);
    (iii) Amortized payments of principal with respect to an evidence of 
indebtedness secured by a mortgage on the taxpayer's housing;
    (iv) Depreciation of housing owned by the taxpayer, or amortization 
or depreciation of capital improvements made to housing leased by the 
taxpayer;
    (v) Interest and taxes deductible under section 163 or 164 or other 
amounts deductible under section 216(a) (relating to deduction of 
interest and taxes by cooperative housing corporation tenant);
    (vi) The expenses of more than one foreign household except as 
provided in paragraph (b)(5) of this section;
    (vii) Expenses excluded from gross income under section 119;
    (viii) Expenses claimed as deductible moving expenses under section 
217; or
    (ix) The cost of a pay television subscription.
    (3) Limitation. Housing expenses are taken into account for purposes 
of this section only to the extent attributable to housing for portions 
of the taxable year within the period during which the individual 
satisfies the requirements of Sec. 1.911-2(a). Housing expenses are not 
taken into account for the period during which the value of the 
individual's housing is excluded from gross income under section 119, 
unless the individual maintains a second foreign household described in 
paragraph (b)(5) of this section. If an individual maintains two foreign 
households, only expenses incurred with respect to the abode which bears 
the closest relationship, not necessarily geographic, with respect to 
the individual's tax home shall be taken into account, unless one of the 
households is a second foreign household.
    (4) Reasonableness. An amount paid for housing shall not be treated 
as reasonable, for purposes of paragraph (a) of this section, to the 
extent that the expense is lavish or extravagant under the 
circumstances.
    (5) Expenses of a second foreign household--(i) In general. The term 
``second foreign household'' means a separate abode maintained by an 
individual outside of the U.S. for his or her spouse or dependents (who, 
if minors, are in the individual's legal custody or the joint custody of 
the individual and the individual's spouse) at a place other than the 
tax home of the individual because of adverse living conditions at the 
individual's tax home. If an individual maintains a second foreign 
household the expenses of the second foreign household may be included 
in the individual's housing expenses under paragraph (b)(1) of this 
section. Under no circumstances shall an individual be considered to 
maintain more than one second foreign household at the same time.
    (ii) Adverse living conditions. Solely for purposes of paragraph 
(b)(5)(i) of this section, adverse living conditions

[[Page 20]]

are living conditions which are dangerous, unhealthful, or otherwise 
adverse. Adverse living conditions include a state of warfare or civil 
insurrection in the general area of the individual's tax home. Adverse 
living conditions exist if the individual resides on the business 
premises of the employer for the convenience of the employer and, 
because of the nature of the business (for example, a construction site 
or drilling rig), it is not feasible for the employer to provide housing 
for the individual's spouse or dependents. The criteria used by the 
Department of State in granting a separate maintenance allowance are 
relevant, but not determinative, for purposes of determining whether a 
separate household is provided because of adverse living conditions.
    (c) Base housing amount--(1) In general. The base housing amount is 
equal to the product of 16 percent of the annual salary of an employee 
of the United States who is compensated at a rate equal to the annual 
salary rate paid for step 1 of grade GS-14, multiplied by the following 
fraction:
[GRAPHIC] [TIFF OMITTED] TC14NO91.140


For purposes of the above fraction, the number of qualifying days is 
determined in accordance with Sec. 1.911-3(d)(3).
    (2) Annual salary of step 1 of grade GS-14. The annual salary rate 
for a step 1 of grade GS-14 is determined on January first of the 
calendar year in which the individual's taxable year begins.
    (d) Housing cost amount exclusion--(1) Limitation. A qualified 
individual who has elected to exclude his or her housing cost amount may 
only exclude the lesser of the full amount of either the individual's 
housing cost amount attributable to employer provided amounts or the 
individual's foreign earned income for the taxable year. A qualified 
individual who elects to exclude his or her housing cost amount may not 
claim less than the full amount of the housing cost exclusion determined 
under this paragraph.
    (2) Employer provided amounts. For purposes of this section, the 
term ``employer provided amounts'' means any amounts paid or incurred on 
behalf of the individual by the individual's employer which are foreign 
earned income included in the individual's gross income for the taxable 
year (without regard to section 911). Employer provided amounts include, 
but are not limited to, the following amounts: Any salary paid by the 
employer to the employee; any reimbursement paid by the employer to the 
employee for housing expenses, educational expenses for the individual's 
dependents, or as part of a tax equalization plan; the fair market value 
of compensation provided in kind (including lodging, unless excluded 
under section 119, relating to meals and lodging furnished for the 
convenience of the employer); and any amount paid by the employer to any 
third party on behalf of the employee. An individual will only have 
earnings that are not employer provided amounts if the individual has 
earnings from self-employment.
    (3) Housing cost amount attributable to employer provided amounts. 
For the purpose of determining what portion of the housing cost amount 
is excludable and what portion is deductible the following rules apply. 
If the individual has no income from self-employment, then the entire 
housing cost amount is attributable to employer provided amounts and is, 
therefore, excludable to the extent of the limitation provided in 
paragraph (d)(1) of this section. If the individual only has income from 
self-employment, then the entire housing cost amount is attributable to 
non-employer provided amounts and is, therefore, deductible to the 
extent of the limitation provided in paragraph (e) of this section. In 
all other instances, the housing cost amount attributable to employer 
provided amounts shall be determined by multiplying the housing cost 
amount by the following fraction: Employer provided amounts over foreign 
earned income for the taxable year. The housing cost amount attributable 
to non-employer provided amounts shall be determined by subtracting the 
portion of the housing cost amount attributable to employer provided 
amounts from the total housing cost amount.

[[Page 21]]

    (e) Housing cost amount deduction--(1) In general. If a portion of 
the individual's housing cost amount is determined under paragraph 
(d)(3) of this section to be attributable to non-employer provided 
amounts, the individual may deduct that amount from gross income for the 
taxable year but only to the extent of the individual's foreign earned 
income (as defined in Sec. 1.911-3) for the taxable year in excess of 
foreign earned income excluded and the housing cost amount excluded from 
gross income for the taxable year under Sec. 1.911-3 and this section.
    (2) Carryover. If any portion of the individual's housing cost 
amount deduction is disallowed for the taxable year under paragraph 
(e)(1) of this section, such portion shall be carried over and treated 
as a deduction from gross income for the succeeding taxable year (but 
only for the succeeding taxable year) to the extent of the excess, if 
any, of:
    (i) The amount of foreign earned income for the succeeding taxable 
year less the foreign earned income and the housing cost amount excluded 
from gross income under Sec. 1.911-3 and this section for the 
succeeding taxable year over,
    (ii) The portion, if any, of the housing cost amount that is 
deductible under paragraph (e)(1) of this section for the succeeding 
taxable year.
    (f) Examples. The following examples illustrate the application of 
this section. In all examples the annual rate for a step 1 of GS-14 as 
of January first of the calendar year in which the individual's taxable 
year begins is $39,689.

    Example 1. B, a U.S. citizen is a calendar year taxpayer who was a 
bona fide resident of and whose tax home was located in foreign country 
G for the entire taxable year 1982. B receives an $80,000 salary from 
B's employer for services performed in G. B incurs no business expenses. 
B receives housing provided by B's employer with a fair rental value of 
$15,000. The value of the housing furnished by B's employer is not 
excluded from gross income under section 119. B pays $10,000 for housing 
expenses. B's gross income and foreign earned income for 1982 is 
$95,000. B elects the foreign earned income exclusion of section 
911(a)(1) and the housing cost amount exclusion of section 911(a)(2). B 
must first compute his housing cost amount exclusion. B's housing cost 
amount is $18,650 determined by reducing B's housing expenses, $25,000 
($15,000 fair rental value of housing and $10,000 of other expenses), by 
the base housing amount of $6,350 (($39,689x.16)x365/365). Because B has 
no income from self-employment, the entire amount is attributable to 
employer provided amounts and therefore, is excludable. B's section 
911(a)(1) limitation is $75,000. That is the lesser of $75,000x365/365 
or $95,000-18,650. B's total exclusion for 1982 under section 911(a)(1) 
and (2) is $93,650.
    Example 2. The facts are the same as in example 1 except that B's 
salary for 1982 is $70,000. B's foreign earned income for 1982 is 
$85,000. B's housing cost amount is $18,650, all of which is 
attributable to employer provided amounts. B's housing cost amount is 
excludable to the extent of the lesser of B's housing cost amount 
attributable to employer provided amounts, $18,650, or the foreign 
earned income for the taxable year, $85,000. Thus, B excludes $18,650 
under section 911(a)(2). B's section 911(a)(1) limitation for 1982 is 
$66,350 (the lesser of $75,000x365/365 or $85,000-18,650). B's total 
exclusion for 1982 under section 911(a)(1) and (2) is $85,000.
    Example 3. The facts are the same as in example 2 except that in 
1983, B receives $5,000 attributable to services performed in 1982. B 
may exclude the entire $5,000 in 1983 because such amount would have 
been excludable under Sec. 1.911-3(d)(1) had it been received in 1982.
    Example 4. C is a U.S. citizen self-employed and a calendar year and 
cash basis taxpayer. C arrived in foreign country H on October 3, 1982, 
and departed from H on March 8, 1984. C's tax home was located in H 
throughout that period. C was physically present for 330 full days 
during the twelve consecutive month period August 30, 1982, through 
August 29, 1983. The number of C's qualifying days in 1982 is 124. 
During 1982 C had $35,000 of foreign earned income, none of which was 
attributable to employer provided amounts and $8,000 of reasonable 
housing expenses. C's housing cost amount is $5,843 ($8,000-
((39,689x.16)x124/365)). C elects to exclude her foreign earned income 
under Sec. 1.911-3(d)(1). C's section 911(a)(1) limitation for 1982 is 
$25,479 (the lesser of C's foreign earned income for the taxable year 
($35,000) or the annual rate for the taxable year multiplied by the 
number of C's qualifying days over the number of days in the taxable 
year ($75,000x124/365=$25,479). C may not claim the housing cost amount 
exclusion under section 911(a)(2) because no portion of the housing cost 
amount is attributable to employer provided amounts. C may deduct the 
lesser of her housing cost amount ($5,843) or her foreign earned income 
in excess of amounts excluded under section 911(a) ($35,000-
25,479=$9,521). Thus, C's housing cost amount deduction is $5,843.
    Example 5. The facts are the same as in example 4 except that C had 
$30,000 of foreign

[[Page 22]]

earned income for 1982, none of which was attributable to employer 
provided amounts. C elects to exclude $25,479 under Sec. 1.911-3(d)(1). 
C may only deduct $4,521 of her housing cost amount under paragraph 
(e)(1) of this section because her foreign earned income in excess of 
amounts excluded under section 911(a) is $4,521($30,000-25,479). The 
$1,322 of unused housing cost amount deduction may be carried over to 
the subsequent taxable year.
    Example 6. The facts are the same as in example 4 except that C had 
$15,000 of foreign earned income of 1982, none of which was attributable 
to employer provided amounts. C elects to exclude the entire $15,000 
under Sec. 1.911-3(d)(1). C is not entitled to a housing cost amount 
deduction for 1982 since she has no foreign earned income in excess of 
amounts excluded under section 911(a). C may carry over her entire 
housing cost amount deduction to 1983.
    Example 7. The facts are the same as in example 6. In addition, 
during taxable year 1983 C had $115,000 of foreign earned income, none 
of which was attributable to employer provided amounts, and $40,000 of 
reasonable housing expenses C elects to exclude her foreign earned 
income under Sec. 1.911-3(d)(1). C's section 911(a)(1) limitation is 
the lesser of $115,000 or $80,000 ($80,000x365/365). C's housing cost 
amount for 1983 is $33,650 (40,000-(39,689x.16)x365/365). Since no 
portion of that amount is attributable to employer provided amounts, C 
may not claim a housing cost amount exclusion. C may deduct the lesser 
of her housing cost amount ($33,650) or her foreign earned income in 
excess of amounts excluded under section 911(a) ($115,000-
80,000=35,000). Thus, C may deduct her $33,650 housing cost amount in 
1983. In addition, C may deduct $1,350 of the housing cost amount 
deduction carried over from taxable year 1982.

(($115.000-80,000)-33,650=$1,350). The remaining $4,493 ($5,843-1,350) 
of the housing cost amount deduction carried over from taxable year 1982 
may not be deducted in 1983 or carried over to 1984.
    Example 8. D is a U.S. citizen and a calendar year and cash basis 
taxpayer. D is a bona fide resident of and maintains his tax home in 
foreign country J for all of taxable year 1984. In 1984, D earns $80,000 
of foreign earned income, $60,000 of which is an employer provided 
amount and $20,000 of which is a non-employer provided amount. D's total 
housing cost amount for 1984 is $25,000. D elects to exclude, under 
section 911(a)(2), the portion of his housing cost amount that is 
attributable to employer provided amounts. D's excludable housing cost 
amount is $18,750; that is the total housing cost amount ($25,000) 
multiplied by employer provided amounts for the taxable year ($60,000) 
over foreign earned income for the taxable year ($80,000). D also elects 
to exclude his foreign earned income under Sec. 1.911-3(d)(1). D's 
section 911(a)(1) limitation for 1984 is $61,250 (the lesser of $80,000-
$18,750 or $80,000x366/366). D's total exclusion for 1984 under section 
911(a)(1) and (2) is $80,000. D cannot claim a housing cost amount 
deduction in 1984 because D has no foreign earned income in excess of 
his foreign earned income and housing cost amount excluded from gross 
income for the taxable year under Sec. 1.911-3 and this section. D may 
carry over his housing cost amount deduction of $6,250, the total 
housing cost amount less the portion attributable to employer provided 
amounts ($25,000-18,750), to taxable year 1985.

(Sec. 911 (95 Stat. 194; 26 U.S.C. 911) and sec. 7805 (68A Stat. 917; 26 
U.S.C. 7805) of the Internal Revenue Code of 1954)

[T.D. 8006, 50 FR 2970, Jan. 23, 1985]