Q: My parents “gifted” their house to us over five years ago to avoid having the home sold to pay for Medicaid expenses. Now they are 87 and need to move. They may buy a smaller house.

My four siblings and I own the home but the home is occupied and used by my parents. Since we inherited their very low “basis”, our capital gains amount is going to be very high and our tax rate will be about 20 percent, rather than our parents 10 percent rate.

Is there any way to gift the house back to them so we will pay less in taxes? We can’t avoid it altogether, because they won’t have owned the home for more than 2 years before they sell it.

A: If you gift the home back to your parents and they turn around and sell it, the sale will be taxed at ordinary income tax rates, unless they wait one year to sell the home. They would have to wait at least two years to take advantage of the $500,000 tax exclusion on the sale of a primary residence by married couples ($250,000 for individuals) and they may not have time to wait that long.

Your situation is not unique. Many parents try to get rid of their assets to avoid paying Medicaid expenses. When your parents gifted the home to you, you effectively obtained the home at your parents cost. If you and your siblings now sell the home, the different between your parents’ cost of the home, including major improvements to the home over the years, is what you would pay tax on the sale. Had your parents kept the home and now sold it, there probably would be no tax to pay due to the primary home sale exclusion.

Now that you are in this situation, you might just have to sell the home and pay the taxes, whatever they might be. While you can transfer the home back to your parents, the net result might be worse if they now sell the home and have to pay taxes on the sale at ordinary income tax rates.

To fully appreciate the amounts you are talking about, you should determine what the profit would be from the sale of the home. You also need to assess the risk of giving the home back to your parents at their ages and the risk that they might have to sell it now. Keep in mind that you usually want to transfer assets from parents to children and usually not the other way around if you are trying to avoid estate tax issues.

This year is a particularly interesting year for estate planning issues. As of January 1, 2010, the estate tax disappeared but other tax laws changed as well. If your parents had owned the home and died this year, they would have to pay no estate taxes, but the transfer of the home from your parents to all of you would be at their cost. In previous years, when parents died and a home passed to children, the children received the home at the home’s value at the time the parents died.

Those issues pose an interesting dilemma for you now. For more details, you should sit down with either an estate planner or a tax accountant to help work through your situation.