The Mortgage Debt Relief Act of 2007 is set to expire at the end of 2012.

What’s that mean?

It means that if you are considering a short sale and/or foreclosure the time to act is yesterday. That’s because the amount a lender forgives on a primary residence will be taxable on federal income taxes the second the clock strikes midnight on Jan. 1, 2013.

Indeed, banks must sign off on a deal, as well as agree to release the distressed homeowner from the debt/shortfall before Dec. 31, 2011.

Currently, under the five-year plan, the Internal Revenue Service (IRS) “allows taxpayers to exclude income from the discharge of debt on their principal residence…. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.”

In 2013?

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Fewer homeowners are burdened with underwater mortgages this year when compared to statistics from 12 months ago in 2009, according to a report released today by Zillow.com (via Reuters).

Here’s the skinny:

“The percentage of American single-family homes with mortgages in negative equity fell to 21.5 percent in the second quarter from 23.3 percent in the first quarter and 23 percent a year ago.”

The term “underwater” describes homeowners who owe more money on their mortgages than what their homes are really worth.

The Smith’s, for example, took out a $250,000 loan on a house in 2003 that now appraises for $190,000. They are, therefore, underwater to the tune of about $60,000.

Underwater mortgages are bad because it limits what the homeowners can do if their finances take a hit. Refinance? Not allowed. Sell? Maybe, but be prepared to cut a very large check at closing.

So the good news is that the number of upside-down homeowners is down a few percentage points, which means that more of them have options at their disposal.

One might also speculate that home values were beginning to correct after a drastic free fall. But the report warns that home values will likely continue to fall until the end of 2010.

If and when that reaches bottom, expect the percentage of underwater mortgages to start dropping significantly shortly thereafter.

It can’t happen soon enough.

Three years ago, just as the housing market was beginning its rapid descent, we purchased a perfect three-bedroom home in South Florida for $325,000.

It was in a great neighborhood. Excellent school district. We were set.

At the time it was priced right to sell ($379,000) — other nearby homes were hovering around the low $400′s. So we were thrilled when our “miracle offer” was accepted with no counters or questions asked. We celebrated the “steal of the century.”

Unfortunately, our joy didn’t last long.

Each year we helplessly watched as our home value continued to sink like a rock. We’re still not even sure if it has hit bottom — we’re too scared to look.  Last time we checked our home was roughly worth about $250,000, which is about a $75,000 hit.

Many homeowners today are in similar if not worse positions. We understand that. Still, that’s a lot of money.

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… is literally upside down, including everything inside it.

This is some rather clever construction; however it is certainly not the most practical home ever built.

In fact, according to an article from Reuters, the inverted residence is unsurprisingly more for spectacle than it is comfortable living.

Those who have visited the home have reportedly felt “dizzy and disorientated,” which is perhaps how countless homeowners here in the United States likely feel who are currently upside down on their mortgages.

Indeed, the current downturn in the real estate market has affected numerous borrowers nationwide who now owe the lenders more than their homes are actually worth.

The good news is that banks today are more willing to renegotiate loans for those who are in this type of situation to avoid tacking more foreclosures onto their books.

So if you can’t ride out this economic storm contact your lender sooner rather than later to determine any and all available options.

It will certainly make you feel a little lightheaded — in a good way — by relieving all that stress.