This woman is a world-class word-twister/deflector. She has a future in the White House, lol.
Sharing a house with her while you "live your own lives" is not a realistic option when you're dealing with someone determined to make you miserable and blame you for whatever she doesn't like.
I'd suggest calling some women's shelters and see if they have any housing resources they can suggest. You ARE dealing with verbal/emotional abuse on a daily basis. This is horrible for you and your kids. Even if you had to live in a tiny place, on a shoestring budget, for a while, it would be temporary and I think the peace would well worth it.