Interesting. It would appear to depend on whether the following language from the tax regs applies:
However, a sale, exchange, or other transfer of property made in the ordinary course of business (a transaction which is bona fide, at arm’s length, and free from any donative intent), will be considered as made for an adequate and full consideration in money or money’s worth.
While we don’t know enough to be sure, I’m guessing this arrangement is not necessarily motivated by donative intent, but may instead be a matter of one sib not wanting to deal with the hassle of owning or selling the property. Yet we can’t say it’s at arm’s length, so IRS would likely not consider it to be in the ordinary course of business. Elsewhere they’ve emphasized that intent doesn’t matter, so a lack of donative intent standing by itself doesn’t prevent it from being a taxable transfer. On balance, I’d say you’re right and the situation calls for the filing of Form 709.