You have your own principles and beliefs and are allowed to choose what you want in your own home.
That said, I've been the one in your sister-in-law's situation. Years ago, I was recently divorced and had planned to visit my family in California for Christmas. I'd also been dating a wonderful man for a few months and he wanted to spend Christmas with me. My father decided that, considering my 'track record', he wasn't comfortable with the idea of this boyfriend flying down and spending Christmas day with us. He felt that it would 'ruin' Christmas for him. Boyfriend and I decided to meet up the day after Christmas and spend the next few days in San Francisco, just the two of us. In the meantime, the notion of my bringing some 'stranger' was so offensive to my folks that, along with a couple other incidents, they ended up ensuring I would never spend Christmas with them again.
Well, when they finally met the boyfriend, they had egg on their face. He's smart, well-mannered, considerate, caring-- oh, and we are married now. And I'm pretty sure it's safe to say that they think he's the best thing since sliced bread. We lived together for 8 years and had our son well before we decided to get married. We need to teach our children that love, and how we treat others, is the most important priority. Not rules, which are arbitrary at best. Your children WILL eventually question your family's choices and religious practices, no doubt about it. I would rather model love and teach my child that I can love someone and treat them well regardless of the choices that person is making. I mean, do you *really think they are going to want to have sex in your house*?
Of course, it's your house and your rules, but I'll say this: as an atheist, I have to explain a lot to my son regarding Christianity and what people "believe", and I do so with love, tolerance, and the attitude that we can all believe what we like and make our own choices, it's how we treat others that really matters. Our own personal sense of integrity. No matter what you choose, let kindness and your own integrity lead you to your decision. Consider everyone's feelings in this situation. And if you choose not to have them stay with you, do so graciously.
ETA: Lori H-- if I could load up my big orange wheelbarrow full of flowers for you, I would. That was a beautiful response. Thanks!