There is nothing in the transaction that you describe that would result in you or your spouse having to pay any taxes. Your mother in law can give each of you up to $14,000 without having to do anything regarding federal taxes. If she gave you more, she would have to file a gift tax return but still would likely not owe any taxes. She would not have any penalty. She would not be required to put any certain amount into a new house.
The only issue that could result in taxes for anyone is whether or not your mother in law would qualify for the capital gains exclusion for any capital gains on the sale of the home. She must have lived in the home of 2 of the last 5 years before the house is sold in order to qualify for up to $250,000 of capital gains exclusion from federal taxes. I am not knowledgeable about what affect the fact that you have lived in the house might have on the exclusion.
There could be some issues with a new mortgage lender regarding the gift. There are some special procedures that most lenders require to be followed regarding the timing of gifts and assurances that they are gifts and not loans.
