We bought the house with her. It was easier with her demands. She has her areas we have ours. If we remove something from our area of hers, she threatens. If we put down anything in her area the same thing. She is bitter vengeful and hard on the family. A guest comes over and she is the wonderful old woman.
If you feel that mom-in-law might actually call the police some day, keep a daily journal of what Mom does... such as "Mom is resting comfortably after a breakfast of cereal and juice".... "at noon today Mom was very agitated because I took some of her clothes to wash, she now refuses to eat lunch".... "now Mom is threatening to call the police unless I bring back her clothes, which need to be washed". You get my drift.
Maybe a sticker and wall chart might help. Think of a reward that you can give her if she treats you ok (no yelling, swearing, etc) and then use the stickers to track her behavior over time. Is there anything that makes the "warden" happy?
I once read a book about dealing with difficult people. It suggested using statements like, " I'm sorry you feel that way, but... your clothes need to be clean before they can be returned." "I do not appreciate the way you are speaking to me, please lower your voice or I will have to remove myself from this situation." Leave the room and go take a bath and read a book or work on a project with noise cancelling headphones on. Don't give her the audience nor the sparing partner.
You said you have separate areas, I would encourage you to make those lines clear. "I'm sorry, but in our section of the house we do not yell at one another." "If you can not keep your voice to speaking terms, you will have to return to your part of the house." Clear, not angry statements, that reinforce your position may eventually make headway.
Not sure if you are a person of faith, but I always found that praying for difficult people helped me keep my anger under control. Sad that she has family around (you and your family) and yet she is making life miserable. So many seniors would love to have family to spend time with.
Strength to you kallib5!