Time is ticking to get a fresh start.

According to recent data by CoreLogic, a leading provider of information, analytics and business services, almost 1 in 4 homes with a mortgage are underwater. This number has continued to grow quarter over quarter as real estate values continue to decline.

Many underwater homeowners allow their home to go into foreclosure or choose a short sale, where the home is sold for less than the principal balance, to eliminate the mortgage debt. However, any amount of money that is written off as debt forgiveness can have taxable consequences.

Larry Holmes, CPA of Holmes and Associates, says that “If the bank writes down $100,000 in debt on a loan and you are in the 28% tax bracket, you could end up owing Uncle Sam $28,000 in taxes. And you lose your house and credit too. Ouch!”

The good news is that the 2007 Mortgage Debt Relief Act allowed up to $2 million in debt forgiveness for your principal residence. Over the past five years, hundreds of thousands of families have taken advantage of this to sell their home and get a fresh start. However, time is running out. The 2007 Act expires at the end of 2012 and it is unclear whether or not it will be extended.

“If your house is underwater or close to underwater, you would be wise to sell your home this year,” says Bill Parsons, Real Estate Broker for Parsons Realty. “Hoping and praying that the market is going to go up and values are going to return is wishful thinking–at best,” continues Parsons. “With 1 in 4 homes underwater, there is no sign that the market will turn around soon. All of these negative equity homes need to be removed from the market to see values increase. And this could take many many years.”

Parsons, who has helped hundreds of homeowners, says that short sales are getting a lot easier from years past but still can be very complicated. “Some homeowners have multiple liens, past HOA dues and taxes, that can complicate the process. Each additional element can lengthen the sales process.” Timing is becoming even more critical with the looming expiration of the Mortgage debt relief act.

The good news is that there is a way out of your debt crisis. If your house is worth less than what you owe on it, now is the time to do a short sale–don’t wait for a foreclosure. FHA guidelines allow you to purchase another home within 3-years of a short sale and a whopping 7-years after a foreclosure.

The irony is you could probably short sell your house now and buy a similar home in three years for substantially less.