As a part-owner of the home, your father-in-law will need to report his portion of the sale proceeds on his personal tax return. You and your spouse will report the other portion, but only if you have more than $500,000 in profit.
If you wish to avoid this situation, your father-in-law can file a Quit Claim Deed for his portion of the property. Check with a local real estate professional for assistance with this option.
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