Thank you for using justanswer. If your father in law gifts his house to your wife, then her basis for tax purposes is the same as his, cost plus any improvements done over the years. Usually, if people purchased their home many years ago, those homes are worth alot more now that what they paid for them. If your wife inherits the house after her father's death, then she will inherit the house at its fair market value on date of death.
If I'm not reading too much into your question, it sounds like they want to sell the house in the near future? If that's true, and if her dad has lived in that house 2 out of the last 5 years, then he can sell the home and make up to a $250,000 profit ($500,000 is married and both spouses lived in home as main residence 2 out of 5 years) with no tax consequences to him. He will keep the profit tax free.
A person may gift an individual up to $12,000 per year without having to file the gift tax form, and that $12,000/person does not go against the lifetime 2 million limit. So your father inlaw may gift both you, your wife, and any children you may have up to $12,000 each again with no tax consequence. (There is never a tax consequence of receiving a gift, all gift taxes are paid by the giver)
I'm not sure why you thought there would be a loss on any sale of your father in law's home, but unless that home is business/investment property, there is no allowable tax loss on the sale of a personal residence.
I hope this helps
border="0" cellspacing="0" cellpadding="1">
Frequently Asked Questions - 10. Capital Gains, Losses/Sale of Home
Positive feedback and bonuses are always appreciated