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Question 1: Since the condo was in her (not FIL's) name, from a tax perspective this is a gift (and not an inheritance), correct?

Correct. But in this case, to you, it's free of income taxes either way, and since what DH is getting is cash, there are no questions of basis, value, etc. So on your end there's no difference.

Question 2: To use Option 2, would it be OK for the check to be made out to just DH? We're in Maryland (not a community property state), if that makes a difference. So I don't know if the IRS would consider DH & me to be half-and-half recipients just by virtue of our being married, or if the check should be made out to "Mr & Mrs YG." (I think SIL would be more likely to honor a request to write "Mr & Mrs" on the check than to file a Form 709.)

It would certainly be OK, and doesn't create any reporting problems on your end. Whether or not she wants to file 709 and/or elect to split gifts is between SIL, her husband, and their attorney or tax preparer.

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