If Dad-in-law gave it to you before death, it would be a gift (not an inheritance.) However, if he lived in it until death (e.g., he retained a life estate) then it would still receive a "step-up" in cost to fair market value at the date of death. If there were three owners and none lived in it after Dad's death, each would report 1/3 of
- The sales price minus closing costs, minus
- Cost equal to the fair market value at the date of death
If sold shortly after death, this usually results in a small deductible loss. If a family member lived in it after death, this would result in a non-deductible loss.
If he didn't retain a life estate and live in it it would be taxed as a gift, in which cash your cost wouldn't be FMV, but rather would be 1/3 of Dad's cost.
(Sorry to keep asking questions but you might notice in this reply, details matter.)
