I am currently renting a 3 bedroom 1.5 bathroom house in the Silicon valley from my father in law for about 60% of the market rent for similar properties in the area. My father in law does not want to be in the landlord business and has always said he wants to sell the house to us. 

Houses in our area are comping for around 700K- 750K for a similar layout but the problem is they are in move in condition. My father in law has always done things about 70 percent and the house is currently in that semi unfinished state (I spent 5k just to have it cleaned and functional before I moved in). That being said I estimate there is about 30-50k worth of work to bring it up to the level of the comps in the area.

My wife and I are not rich but we have no debt, we have 250K in our retirement, I have a pension I am vested in and we have about money tied up in investments that we can if need be make liquid.

I have been working with a mortgage broker friend and he says we are golden to purchase anytime but I don't want to go the traditional route with 20% cash and here is the strategy question.  

My father in law owes about 300k on the house and with repairs closing costs and such give him about 350-370K in debt to sell it on the open market. If he does so under advice of my broker friend he can expect to sell it for 725k max (due to recent sales data). That leaves him with about 355-375k in profit. He will not roll this money into another property (no 1031) so he will have a tax bill on this of about 75K (20% is my understanding) leaving him with about 300k profit.

My father in law want to help us and his grandson stay in the area and is willing to be creative. So my plan is to have him gift us the 20% of the appraised value as our down (Appraisal will be done this week and looks like it will be around 650k) 130K and he is fine with that and we would get a traditional mortgage after that. It is my understanding if he gifts us equity there is a transfer tax on that, is that true? Also I understand the upper limit of tax free profit on your primary residence is 250k is that true. My father in law likes the number 250k and he is willing to sacrifice the 50K more he would make on the open market vs giving us some equity and helping us buy the house. Is there any other thoughts or strategies on this situation as I want everyone to win in this situation.