You need to consult with a local attorney or tax professional as soon as practicable.
See https://www.avvo.com/estate-planning-lawyer.html
See https://taxexperts.naea.org/listing/service/estates-gifts-trusts
A couple of general notes, however.
1) A DPOA terminates upon the death of the principal (it typically will only become effective upon the principal's incapacity). As a result, if your wife used the POA to transfer title after her mother's death, the transfer was technically ineffective and, as the title company indicated, title was still in her mother's name.
2) The language of Topic 703 is couched in very general terms. Here the cost basis would appear to be the fair market value on the date of death of your wife's mother (in 2012). The date the actual transfer occurred is irrelevant. Rather Section 1014 of the Code is applicable. See https://www.law.cornell.edu/uscode/text/26/1014
3) Your wife's sister may meet the requirements of Section 121 (the home sale exclusion - see https://www.irs.gov/taxtopics/tc701), but your wife will not since she, apparently, has not used the home as her main home for at least two years out of the last five years prior to the date of the sale.
Again, you should consult with a local attorney and/or tax professional.
