Yes, the exclusion will only apply to your father-in-law and for his portion of ownership in the property.
Since all 3 of you own the property equally if you chose to sell it the sale needs to also be reported the same way.
Even if you did split it two ways the portion you and your wife have still has a gain on the property that you would report for tax purposes.
The gain you are talking about has already had the cost of the property taken out so the $130 you refer to as gain is the taxable amount to you and your wife.
@axphoude
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