Text is copied to your instance’s database, but any images are hosted on the other instances and simply linked to. Worst case scenario, you get told to delete something that’s illegal in the country in which you host the instance, you comply, and everything’s peachy.
Edit: That being said, I’m currently hosting an instance for myself and a few friends, and it’s been smooth-sailing. Just make sure to require email verification or admin approval for new sign-ups (or disable them entirely) if you don’t want to be overrun with bots.