We are newly married this year. My husbands parents gifted him 84,000 to put down on his home. They now want the money back plus interest. If we sell the home, can we repay them in a lump sum and av

[Anonymous]

we can not give legal advice about whether it was a gift or a loan.  there is a big difference.  if you did return the money with interest, the interest would not be deductible.  any gain on the sale of your home would be taxable to the extent it exceeded any available exclusion.  married couples filing a joint return can exclude up to $500.000 of the gain under the following conditions:

1) either or both of you have must have owned the residence for at least two years out of the five years prior to the sale and

2) both of you must have used the residence as their principal residence for at least two out of the five years prior to the sale (if only one meets this condition and the other condition above is met the exclusion is $250,000) and

3) during the two-year period ending on the date of the sale, neither spouse excluded gain from the sale of another home (there is a special rule if this condition is not met by one of the spouses)  

[xmasbaby0]

Your question was cutoff in mid-sentence.  Best guess -- you want to know if you can avoid paying capital gains on the sale of the house.  What you do with the proceeds of the sale is irrelevant in regard to whether you owe capital gains.

What matters is whether your spouse -- and you -- meet the criteria as explained by HACKITOFF to exclude the gain.  The issue of whether the money from your spouse's parents was a loan or a gift is s sticky family matter and/or a legal issue which we cannot help with here.  You say you are newly married--there may be information about that "gift" you do not understand or know about.  You have not mentioned whether the parents' names are on the deed or mortgage along with your spouse's name.  You may need legal advice to sort it out.

[Opus 17]

If you owned the home less than two years, there is a partial capital gains exclusion if you are forced to sell for "unforeseen circumstances" sometimes also called a hardship exclusion.  For example, if you owned the home for 6 months (25% of two years) you can exclude up to $125,000 of your gain if you are married (25% of the $500,000 exclusion limit).  In Turbotax, you would enter the sale of your home and check the box for the hardship exclusion.  Don't attach proof to your tax return, wait and see if the IRS audits you.  Examples of hardships that qualify for the partial exclusion are given in publication 523.

https://www.irs.gov/pub/irs-pdf/p523.pdf

Whether this situation would actually qualify for the partial exclusion is not something I can answer.  The parents may have no legal right to demand the money back (depending on the circumstances) and making a voluntary repayment to keep the family happy (this is happy?) may not qualify as an actual hardship for the partial exclusion.  You may want to seek professional legal and tax advice.