I would think so, but I think you should ask that question of an estate planning attorney who can give you professional advice and prepare the 709 for you.
I do not understand the income-tax issues with the mortgage, but that article I linked to discusses it. That's what I would be really worried about. I wouldn't be very worried about the gift/estate tax issue unless your estate at the time of your death is likely to be more than $12M (which may change of course). If that's the case then you don't want to give the half of the house in a way that uses up your estate tax free amount. (E.g. perhaps give $164 net gift each year until you've got to your 50% value, or do something with discounts. These are questions for an estate planning attorney).
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