My family and I are finally in the position to purchase our first house, in particular, the one we live in. It belongs to my mother, who is quite elderly. Since it is out in the country, she has been wanting to move into town. Now, she has brought up the idea that possibly, she would just stay where she is at, we would inherit the house before her death and we could take what we have for a substantial down payment and put it towards remodeling and adding on to the existing home. This makes sense to me since she does not drive, we are her wheels and I am not convinced she would like it much in the "city". What are the downfalls of inheriting a house before death? Would it be better to have my mother be our "mortgage holder"? The more I think about this, the more my head spins!

You would not inherit the house before her death. She could "gift" it to you but a gift that large you would have to pay income tax on. There is no income tax on inherited property, you just have to pay the inheritance taxes. Mom would have to specifically state she is passing the house to you in her will. (Make out a new will) If she just leaves her estate to you, ( I assume you are her only child and her husband is out of the picture?) the house becomes part of her estate and if she has any other outstanding debts it might end up being sold to cover them. She is your mother. You have a duty to care for her in old age, if you didn't it would be neglect on your part. She would have to use her own property (her house) to cover her expenses in her lifetime or you could just support her yourself knowing her assets would pass to you at her death. But if she does have assets, you couldn't call her your dependent.

You can't inherit something from someone who is still alive. However, your mother could gift the house to you. She would have to file a gift tax form to disclose the gift (based on the fair market value of the property), but no actual taxes are due unless the total value of all gifts she makes throughout her lifetime that are in excess of the annual gift exclusion (currently $12K) reaches $1M. Gifts above the annual exclusion count against the exclusion amount from estate tax- but if her estate is sufficiently large to potentially trigger estate taxes when she dies you should see a lawyer and/or financial planner to figure out the best course of action.

Absolutely as ebaines has stated, see a lawyer, preferably an elder care attorney.
One factor to consider, if she in some way assigns part or all of her assets to you, she will be penalized if it becomes necessary to go into a long term care facility.
The value of any assets given away within 5 years prior to needing Medicaid assistance, will be divided by the monthly cost of the nursing home and Medicaid won't participate in care until enough months have passed, paid privately. In other words, if she gave away 100,000 and home costs 6,000/month, your mom would have to pay for the first 17 months on her own. But if she still owns the house, they can't make her liquidate it in certain conditions. The last I read, 25% of citizens have to use nursing homes. But a larger percentage have to have home care, which is very expensive too. By all means, discuss this with an attorney who is well-versed in elder care. They should be able to come up with a plan to do what all of you want and not jeopodize your mother's future. Get more than one opinion if they don't know how to handle it.