Yael:
The definition of what qualifies as foreign housing costs is within IR Code Section 911. This reads as follows:
"Sec. 911. Citizens or residents of the United States living abroad
(a) Exclusion from gross income
At the election of a qualified individual (made separately with
respect to paragraphs (1) and (2)), there shall be excluded from
the gross income of such individual, and exempt from taxation under
this subtitle, for any taxable year -
(1) the foreign earned income of such individual, and
(2) the housing cost amount of such individual.
(b) Foreign earned income
(1) Definition
For purposes of this section -
(A) In general
The term ''foreign earned income'' with respect to any
individual means the amount received by such individual from
sources within a foreign country or countries which constitute
earned income attributable to services performed by such
individual during the period described in subparagraph (A) or
(B) of subsection (d)(1), whichever is applicable.
(B) Certain amounts not included in foreign earned income
The foreign earned income for an individual shall not include
amounts -
(i) received as a pension or annuity,
(ii) paid by the United States or an agency thereof to an
employee of the United States or an agency thereof,
(iii) included in gross income by reason of section 402(b)
(relating to taxability of beneficiary of nonexempt trust) or
section 403(c) (relating to taxability of beneficiary under a
nonqualified annuity), or
(iv) received after the close of the taxable year following
the taxable year in which the services to which the amounts
are attributable are performed.
(2) Limitation on foreign earned income
(A) In general
The foreign earned income of an individual which may be
excluded under subsection (a)(1) for any taxable year shall not
exceed the amount of foreign earned income computed on a daily
basis at an annual rate equal to the exclusion amount for the
calendar year in which such taxable year begins.
(B) Attribution to year in which services are performed
For purposes of applying subparagraph (A), amounts received
shall be considered received in the taxable year in which the
services to which the amounts are attributable are performed.
(C) Treatment of community income
In applying subparagraph (A) with respect to amounts received
from services performed by a husband or wife which are
community income under community property laws applicable to
such income, the aggregate amount which may be excludable from
the gross income of such husband and wife under subsection
(a)(1) for any taxable year shall equal the amount which would
be so excludable if such amounts did not constitute community
income.
(D) Exclusion amount
(i) In general
The exclusion amount for any calendar year is the exclusion
amount determined in accordance with the following table (as
adjusted by clause (ii)):
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For calendar year - The exclusion amount is -
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1998 $72,000
1999 74,000
2000 76,000
2001 78,000
2002 and thereafter 80,000.
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(ii) Inflation adjustment
In the case of any taxable year beginning in a calendar
year after 2005, the $80,000 amount in clause (i) shall be
increased by an amount equal to the product of -
(I) such dollar amount, and
(II) the cost-of-living adjustment determined under
section 1(f)(3) for the calendar year in which the taxable
year begins, determined by substituting ''2004'' for
''1992'' in subparagraph (B) thereof.
If any increase determined under the preceding sentence is not
a multiple of $100, such increase shall be rounded to the
next lowest multiple of $100.
(c) Housing cost amount
For purposes of this section -
(1) In general
The term ''housing cost amount'' means an amount equal to the
excess of -
(A) the housing expenses of an individual for the taxable
year to the extent such expenses do not exceed the amount
determined under paragraph (2), over
(B) an amount equal to the product of -
(i) 16 percent of the amount (computed on a
daily basis) in effect under subsection (b)(2)(D)
for the calendar year in which such taxable year
begins, multiplied by
(ii) the number of days of such taxable year within the
applicable period described in subparagraph (A) or (B) of
subsection (d)(1).
(2) Limitation.--
(A) In general.--The amount determined under this
paragraph is an amount equal to the product of--
(i) 30 percent (adjusted as may be provided
under subparagraph (B)) of the amount (computed on
a daily basis) in effect under subsection
(b)(2)(D) for the calendar year in which the
taxable year of the individual begins, multiplied by
(ii) the number of days of such taxable year
within the applicable period described in
subparagraph (A) or (B) of subsection (d)(1).
(B) Regulations.--The Secretary may issue
regulations or other guidance providing for the
adjustment of the percentage under subparagraph (A)(i)
on the basis of geographic differences in housing costs
relative to housing costs in the United States.
(3) Housing expenses
(A) In general
The term ''housing expenses'' means the reasonable expenses
paid or incurred during the taxable year by or on behalf of an
individual for housing for the individual (and, if they reside
with him, for his spouse and dependents) in a foreign country.
The term -
(i) includes expenses attributable to the housing (such as
utilities and insurance), but
(ii) does not include interest and taxes of the kind
deductible under section 163 or 164 or any amount allowable
as a deduction under section 216(a).
Housing expenses shall not be treated as reasonable to the
extent such expenses are lavish or extravagant under the
circumstances....
