Best way to handle this, IMHO, is you each file a 709 for 1/2 of what you gave, which was a gift of equity of $100,000 ($850,000 FMV less $750,000 received from son and daughter-in-law).
You enter each one separately as donee on Schedule A using a basis of $0 and a gift of $25,000 (FMV) to each. Your wife files the SAME way. The total for both of you will then equal the $100,000 gift of equity.
If you try to do this with the adjusted basis of the house and FMV, you won't be able to get the numbers to come out right on the 709. You SHOULD include a statement explaining the transaction so there's no confusion. For the description on Schedule A you can put something like "Gift of Equity - See Statement".
Update: I would also make 10000% sure the house is actually worth $850,000! Note that you and your wife can give your son and daughter-in-law up to $72,000 total for 2024 WITHOUT FILING A 709 - $36,000 to your son and $36,000 to your daughter-in-law.
So, if your son and daughter-in-law paid $750,000 and the house was worth more like $822,000 on the date of the sale, you won't have to bother filing a 709 at all. Appraisals are only ONE person's estimate of value and you could probably get another appraiser to estimate the FMV at closer to $822,000. After all, the difference is not that large.
