Your mother-in-law (MIL) can deed the property to you and your wife, and report the value of the gift on IRS form 709
. Assuming that the value of the gift is less than the current maximum lifetime exemption amount ($5,250,000 for 2013), then that part of the transaction
is complete, and there is no tax effect for your MIL or for you and your spouse.
Once the property is in your name, assuming it is entirely paid off, you can find a lender to refinance the property for the maximum amount your income
and the property value can support. Then, you would simply hold the money in some interest
bearing account and use the proceeds and principal to make gift payments to your MIL. If the payments are no more than $14,000 for both you and your spouse, then the gifts are nontaxable, and nonreportable to the IRS
, for either you or your MIL.
That's pretty much the whole deal.
Hope this helps.