The only person in this scenario who can exclude gain is your father in law. See qualifications for the exclusion below.
In the even of the the sale, if the home you sold had multiple owners, your gain or loss is the gain or loss on the entire sale multiplied by your percentage of ownership. Pub 523
How your sale qualifies. Your sale qualifies for exclusion of $250,000 gain ($500,000 if married filing jointly) if all of the following requirements are met.
- You owned the home and used it as your main home during at least 2 of the last 5 years before the date of sale.
- You didn’t acquire the home through a like-kind exchange (also known as a 1031 exchange), during the past 5 years.
- You didn’t claim any exclusion for the sale of a home that occurred during a 2-year period ending on the date of the sale of the home, the gain from which you now want to exclude
