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HB 2006: Homeowners fret over losing mortgage deduction

By Oregon Small Business Association,

A typical monthly mortgage payment consists of two parts: a repayment on a part of the principle borrowed, and an additional amount based on the interest rate the mortgager charges for the loan. These two items (“principal and interest” or P&I) are added together into one payment for the property owner. Mortgage payments are typically spread out over longer terms – a 30-year mortgage being the standard, but shorter periods also being available. Early mortgage payments consist heavily of interest with small amounts of principle repayment and later ones are heavy principle repayments and smaller amounts of interest. The total owing on the mortgage each month is reduced by the amount of the principle payment.

Under current law, within limits homeowners can deduct any interest they pay on up to 2 property mortgages. This includes the home they live in, and a “second home” or vacation property that you either do not rent out or rent out but also live in at least 14 days per year. Limited deductibility generally applies to high income individuals and is applied to the total claimed on Schedule A. Mortgage interest is deducted as part of Schedule A on your federal income tax filing, along with property taxes, State income taxes, some medical expenses and so forth. The total amount on Schedule A is deducted from your Adjusted Gross Income (AGI) and therefore you do not pay federal taxes on that amount.

The Oregon Legislature is considering House Bill 2006. Passage of this bill would limit the deductibility of home mortgage interest on Oregon State tax returns. The bill would completely eliminate the deduction for all “second” or “vacation” homes and for primary residences for single filers reporting $100,000 of AGI and joint filers with AGI of $200,000. In addition, no deduction would be allowed for any amount of mortgage interest that exceeds a $15,000 total (i.e. if you paid $17,500 in mortgage interest, you could only deduct $15,000 in any one year, assuming you didn’t exceed the AGI limits). HB 2006 would require taxpayers who fall beyond these income limits to “add back” any mortgage interest deducted on their federal returns to create an “Oregon AGI” on which to base their state income taxes.

Precise numbers are not currently available, but currently it is thought that about 60 percent of the benefit of the home mortgage interest deduction for Oregonians goes to those with AGI of $84,000 per year and higher, although the bill’s limits do not reach that low. While there’s no direct correlation between income and mortgage interest paid, it’s probably generally true that if you make more, you are likely to pay more in mortgage interest because you are likely to have a more expensive home and more likely to have a second home.

The ability to qualify for a mortgage is based on income. Mortgage lenders generally set a limit on qualification based on the size of the mortgage payment as a percentage of income.