My wife jointly owns her paternal house with her sister. Her sister lives in that house but my wife does not. The house is big (3 bedroom 2000 sq.ft) for her sister living all by herself and we suggested she should rent the house to earn some rental income and for herself we suggested she should rent a smaller apartment. This move will pay for her rent of a smaller apartment and also use some of the for her other expenses. We (my wife) are not asking her to share the rental income with us at all. She does not like the idea and is completely against it. Now she is asking us to pay our share of taxes and maintenance. My wife and I know that the rental income will cover maintenance and taxes also. We have taken a stand to not pay for taxes and maintenance since she is not allowing to rent out. Who is right? We are aware of the possibility that my wife may lose the property due to non payment of her portion of her financial cost. Is there anything else that we should know?
When you say the two own the house jointly ... is there anything on paper about the nature of the joint ownership? I wouldn't be surprised if the answer is no, but if it is, then there is no easy solution. With exactly two parties you can't take a vote. All you can do is argue.
As @keshlam says, what you really need to do is either, (a) come to an agreement about how decisions about the property will be made, that provides a way to resolve conflicts, and put it in writing; (b) one of you sell your share to the other for some fair price; or (c) sell the house and split the money.
If you can't do one of these things, you could find yourselves fighting over this house for the rest of your lives.
RE renting it out: That may be a smart idea, but it's not a slam-dunk. I own a house that I am renting out, and between paying the mortgage on the place and paying for maintenance, I have lost money every year I've rented it. I had a tenant who did over $10,000 worth of damage to the place, and under my state law, even after they quit paying the rent and I saw how much damage they were doing, it took several months to get them evicted. Even with a good tenant, maintenance costs rack up. I'm not saying don't rent it out. I'm just saying, That's not the obvious right answer. You have to think through all the possibilities.
Refusing to pay your share of taxes and insurance is a risky move. This may work as a tough bargaining stance to get the other person to give in. But if she refuses to give in, you could both lose. If the taxes aren't paid, the government could seize the property. If the insurance isn't paid and then the house burns down, you lose everything. Etc.
Your question isn't clear to me on one point - Is your goal to help the sister or to protect your share of the inheritance?
If the former, to help, this becomes a question of feelings, emotion, and independence. The sister is asking for more than one can reasonably (and mathematically) expect. She owns half the house, lives in it exclusively, but wants you to pay your share of expenses with no benefit to you? You offer, to have the house act as an income producing asset to support her, is more than generous. I'd take such a deal in a heartbeat. But, it seems she doesn't want to be told what to do. In this case, if you don't care about the house for yourself (your wife) you can quit-claim it, give her your share, file a gift tax form 709, with no tax due, just a bit of your lifetime gift used up. This solution does away with the threat that you own something getting seized for non-payment of taxes. In my opinion, her request is unreasonable.
The other side, if your wife wants her share - this is what causes unrepairable damage within families. When I'm asked about how to leave a house to children, I'd advise that unless one child is clearly ready, willing and able to take over the house, never leave it to multiple children. The will should state that the house gets sold and proceeds divided up. Worst case, the current situation has changed, and one sibling pops up to say "I will pay 1/2, 2/3, whatever the other shares value is to buy you all out." If there's no agreement, the sale proceeds. The exception - a fully paid summer home that runs a profit during the season. The will can specify the home not be sold, just continued to be used when not rented, etc. Sorry for the tangent, but this advice may help future readers. If the sister won't listen to reason, your choice is to take legal action. That may be costly, but will certainly alienate the sister for ever.
In my opinion, the first scenario is the kindest way to go. "We are happy to give you our share of this house, but can't pay the bills for you. We have our own bills to pay, own children to pay for college, etc." Unless she's destitute, in which case, you have a completely different scenario.