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Oregon HB 4136: Proposed Limits on Mortgage Interest Deduction for Second Homes

Hey there, fellow Oregon landlords, property managers, and real estate investors. Christian Bryant here from the Portland Area Rental Owners Association (PAROA). With the 2026 legislative session underway, House Bill 4136 has been introduced, and it’s worth a close look if you own multiple properties or are thinking about tax implications down the road. Titled “Relating to tax treatment of mortgage interest; prescribing an effective date,” this bill aims to change how Oregon treats the mortgage interest deduction for personal income tax purposes.


Mr Portland Landlord reporting this article

As of late January 2026, HB 4136 is fresh off the press, sitting at the House Desk awaiting first reading. No committee assignment yet, no sponsors explicitlyListed on the overview, and no amendments. The full introduced text is available via PDF on OLIS, and the catchline spells it out clearly: the bill disallows the mortgage interest deduction for a residence that isn’t the taxpayer’s principal residence—unless the taxpayer is actively selling the property or has it on the market.


Oregon vacation cabin for sale with tax documents overlay representing HB 4136 mortgage interest deduction changes.
Selling exception: The narrow window where the mortgage interest deduction might still apply under HB 4136.

Let’s break this down carefully, because tax changes always hit close to home when you’re in real estate. Oregon’s personal income tax generally starts from federal adjusted gross income, which means many federal deductions, including the mortgage interest deduction, flow through to the state level. Federally, you can deduct qualified mortgage interest on your principal residence and one second home, subject to debt limits. That second home provision has long been a perk for folks with vacation properties or additional residences they use personally. Oregon mortgage interest deduction second homes


HB 4136 would break from that federal conformity in Oregon. If passed as introduced, it would eliminate the state-level benefit of deducting mortgage interest on any residence other than your primary home—full stop, except during the period when you’re trying to sell it or it’s actively listed for sale. The exception for properties being marketed or in the process of sale provides a narrow window, but once sold or off the market, the disallowance kicks in.

To clarify the mechanics: this targets the personal itemized deduction for home mortgage interest under federal rules (IRC Section 163(h)). It does not appear to touch mortgage interest deducted as a business expense on rental properties via Schedule E. For pure investment rentals occupied by tenants, your interest expense remains deductible against rental income, reducing taxable profit from the property. That’s a key distinction, and it’s why this bill’s reach might feel narrower than it first sounds for many in our community.


Still, let’s extrapolate what passage could mean for different players in Oregon’s housing and investment landscape.


For landlords and property managers running rental portfolios: If your properties are true rentals—tenant-occupied most of the year—the mortgage interest should continue to be treated as an ordinary business expense. No direct hit here under the current language. You’d still deduct it on Schedule E, lowering the net rental income subject to tax. That said, keep an eye on any future amendments; bills sometimes evolve in committee.


For real estate investors who own second homes or vacation properties for personal use: This is where the impact lands hardest. If you have a cabin on the coast, a condo in Bend, or any additional residence you use yourself (even part-time), you’d lose the ability to deduct that mortgage interest on your Oregon return. The exception only applies while actively marketing for sale, so holding the property long-term would mean paying state tax on income without that offsetting deduction. Over time, that adds up—potentially thousands per year depending on loan size and interest rates.


For owners of short-term or vacation rentals that qualify as a second home: The lines blur here. If you personally use the property enough to claim it as a second residence federally, Oregon might follow suit and disallow the personal portion of interest under this bill. Properties treated strictly as investments (rented most of the year with minimal personal use) should stay in the business-expense category. The devil is in the details of how you report it, and a change like this could push more owners to maximize rental days to preserve deductions.


For developers and investors building or flipping properties: The selling exception offers temporary relief. If you’re holding a property briefly while marketing it, the deduction remains available. But for longer-term holds of non-principal residences, the increased after-tax cost of financing could cool demand, especially in recreational markets like Central Oregon or the coast. Fewer buyers willing to absorb higher effective carrying costs might soften prices or slow sales velocity in those segments.


Taxpayer comparing primary and second home mortgage interest deductions under proposed Oregon tax changes.
Principal vs. second homes: How HB 4136 could change Oregon mortgage interest deduction rules.

Broader market ripple effects: Second homes and vacation properties make up a meaningful slice of Oregon’s real estate ecosystem. Limiting the deduction could discourage out-of-state buyers or high-income households from purchasing additional residences here, potentially freeing up some inventory for primary-home buyers—or simply reducing overall transaction volume. On the flip side, it generates revenue for the state without touching primary residences, which politicians often view as more palatable.


Common scenarios to consider:


  • You own your primary home in Portland and a vacation cabin in Sisters financed with a mortgage. Under current law, interest on both is generally deductible. Post-HB 4136, the cabin interest would be added back (or not allowed) on your Oregon return unless you’re actively selling the cabin.

  • You buy a duplex, live in one unit (principal residence), and rent the other. Interest allocable to the rental unit remains a business deduction; interest on the owner-occupied portion stays deductible as principal residence.

  • You’re an investor with a portfolio of single-family rentals. Business as usual—interest flows through Schedule E.


Best-practice tips in light of this proposal:


  • Review how you classify each property on your federal return. Personal use days versus rental days can shift a property from “second home” to “rental” treatment.

  • Consult your tax professional early. Oregon’s conformity with federal rules means changes here create extra complexity on the state return.

  • Document marketing efforts carefully if you ever need to use the selling exception—listing agreements, broker correspondence, advertising receipts.

  • Consider refinancing or payoff strategies for non-principal properties if the deduction disappears; the math on carrying costs changes.


Related topics worth noting: Oregon has tweaked tax treatment of real estate before—think capital gains changes, property tax measures, and corporate activity tax impacts on pass-through entities. This fits a pattern of looking for revenue from higher-income or investment activities while protecting primary homeowners.


The bill is brand new, so the text could change significantly as it moves through committee. Amendments might narrow the exception, clarify treatment of mixed-use properties, or add phase-ins.


Call to Action Early bills are the easiest to influence.





Share your perspective—especially if you own or manage second-home-type properties. Explain how the change would affect financing decisions, holding periods, or local markets. Thoughtful input from housing providers can shape better outcomes.


Stay sharp out there, and keep building strong portfolios. PAROA is watching this one closely.


Sources:

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Portland Area Rental Owners Association

12725 SW Millikan Way
Suite 300
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