Translation:My parents were swimming at their house.
So if 'em' means 'in', how do you say 'at'? Swimming in their house to me only means that the house is huge and there are only the two of them.. Empty nest syndrome... Prepositions confuse me in six languages and probably always will.
This translation is wrong, it should have been "My parents were swimming in your house" and not "their house".
I don't think the translation is wrong and I don't think your sentence is necessarily wrong either.
The truth is that the Portuguese sentence is ambiguous and the translation depends on the strategy taken to resolve the problem. Duolingo has taken the view that "sua" means "their" because it refers back to "meus pais". You have taken the view that "sua" means "your" because if you had wanted to say "at their house" you would have written "na casa deles".
More on this issue in this article (in Portuguese): “Seu”: dele, dela ou de você?.
Any reason why "My parents used to swim at your house" is not accepted? Seems to me that it should be fine.
used to swim = "costumavam a nadar" or "nadavam". "estavam nadando" is a specific action in the past.
My mistake! It should be "costumavam nadar". That's one of the problems of not proofreading a text. Luckily, I always follow this step when working =)