Buying Parent's house / Owner financing / Renting back to parent

[Josh Oates]

My wife and I are trying to buy her father's house, move in and he would continue to live in the house and pay us rent.  First issue is he is now divorced and ex-wife is still on the title and is entitled to half of the proceeds from the sell.  The house is owned free and clear.  We are thinking we could get a traditional mortgage for half of the house and pay off my mother in law.  And have my father in law owner finance his half.  We would then rent to him for staying in the house, essentially using the rent to pay him on his self-held mortgage.  We would sell our current primary and use the funds for 2 kids heading off the college and improvements on the house that will need to be made as he is in failing health.

Is this a good strategy to free up cash?  Other creative ways to structure this deal?  What are the tax concerns to look out for?  I am planning to talk with a CPA to make sure we don't miss anything.