Can an Estate Use the Section 121 Exclusion?

An estate can claim the Section 121 exclusion for estates and shelter up to $250,000 of gain when it sells the decedent’s primary residence. The authority isn’t in the statute itself. Congress repealed the provision that explicitly gave estates this right in 2010, and the IRS confirmed in Revenue Ruling 2014-18 that an estate steps into the decedent’s shoes for the ownership and use tests. Combined with the stepped-up basis that inherited property receives, many estates end up owing little or no capital gains tax on the sale.

How the Estate Qualifies

Section 121 lets a taxpayer exclude gain from selling a primary residence if they owned the home for at least two of the five years ending on the sale date and used it as their primary residence for at least two of those same five years.¹ The two periods don’t need to overlap; they just each need to total two years inside that five-year window.

An estate obviously can’t “live” in a house. That’s why Congress originally added Section 121(d)(11) in 2001 to let estates, heirs, and qualified revocable trusts tack the decedent’s ownership and use. When that provision was repealed in 2010, the IRS filled the gap in 2014 with Revenue Ruling 2014-18, treating the estate as a continuation of the decedent for purposes of the two tests.

The practical effect: if the decedent owned and lived in the home as a primary residence for at least two of the five years before the sale, the estate satisfies both tests. The executor doesn’t need to move in. The decedent’s prior qualifying use is enough.

The cap is $250,000, matching the single-taxpayer limit. Even if the decedent was married, the estate is its own taxpayer and gets the individual amount.¹

The Timing Window Is Tighter Than It Looks

There’s no hard deadline in the statute, but the five-year lookback creates a practical one. Once the decedent dies, no one is adding to the two-year use requirement. The clock is running down on the decedent’s qualifying period inside that window.

If the decedent lived in the home right up until death and had owned it for years, the estate has roughly three years to sell before the decedent’s two years of use fall outside the five-year lookback. That’s the best case. If the decedent spent the final year in a hospital or with family, the available window is shorter. Executors who let the property sit for years during a slow probate sometimes discover the exclusion has disappeared, not because a deadline passed but because the math stopped working.

When the Decedent Was in a Care Facility

Time in a nursing home or assisted living facility can still count as use of the home. If the decedent became physically or mentally unable to care for themselves, time spent in a state-licensed care facility is treated as use of the residence, provided the decedent actually lived in the home as a primary residence for at least one year during the five-year lookback.²

The threshold drops from two years to one for this scenario. A decedent who lived at home for 14 months and then spent three years in a nursing home still qualifies: the nursing home period counts as residence in the home, satisfying the two-year use test.

The Surviving Spouse Route to $500,000

A surviving spouse who sells in their own name, rather than through the estate, can potentially claim the full $500,000 exclusion. The statute allows this if the sale happens within two years of the deceased spouse’s death, the surviving spouse hasn’t remarried by the sale date, and neither spouse used the exclusion on another home sale within the prior two years.¹

The surviving spouse can also tack the deceased spouse’s ownership and use periods to satisfy the two-year tests.³ If the deceased spouse owned and lived in the home for years and the couple married recently, the survivor still qualifies on those tacked years.

This is where estates leave money on the table. If the home has meaningful appreciation and title (or estate planning) allows the surviving spouse to sell in their own name rather than through the estate, the available exclusion doubles. It’s worth raising with a tax professional before the property is listed.

Heirs and Revocable Trusts

A beneficiary who inherits the home cannot tack the decedent’s ownership and use the way the estate can. Under Revenue Ruling 2014-18, an heir is a separate taxpayer who must independently satisfy the two-year ownership and use requirements. An heir who inherits and immediately sells won’t qualify for Section 121. An heir who moves in and lives there for two years can qualify on their own use, but not on the decedent’s.

For homes held in a revocable living trust, the answer turns on the Section 645 election. Revenue Ruling 2014-18 concluded that a qualified revocable trust making the Section 645 election can claim the exclusion on the same terms as the estate, tacking the decedent’s ownership and use. Without that election, the trust’s ability to claim the exclusion is less certain. If the home is in a revocable trust, the trustee should raise the Section 645 election with a tax advisor before selling.

The Stepped-Up Basis Usually Does More Work

Before focusing on Section 121, check whether there’s much gain to exclude. Property acquired from a decedent receives a stepped-up basis equal to fair market value on the date of death.⁴ If the decedent bought the home for $150,000 and it was worth $450,000 at death, the estate’s basis is $450,000. Gain is measured from that stepped-up figure.

If the estate sells quickly and the market hasn’t moved much, the sale price and the stepped-up basis may be close enough that little or no gain exists. Section 121 becomes the backup, mattering most when values rise meaningfully between the date of death and the sale, or when the sale takes many months in an appreciating market.

Establishing the stepped-up basis takes a reliable date-of-death value. In practice, that means a professional appraisal. The IRS can challenge the values reported on an estate tax return or income tax return, so keeping documentation of the appraisal method and the appraiser’s qualifications protects the estate if questions come up later.

Rental or Business Use Reduces the Exclusion

If the decedent rented out the home or used part of it for business at any point after 2008, two things complicate the exclusion.

Any period of nonqualified use after January 1, 2009 (time when the property wasn’t a primary residence) reduces the excludable gain proportionally. The nonqualified-use fraction is the nonqualified period divided by the total ownership period.¹ Twenty years of ownership with four years of post-2008 rental use puts roughly 20% of the gain outside the exclusion.

Separately, any depreciation claimed during rental or business use after May 6, 1997 cannot be excluded under Section 121. That depreciation is recaptured as unrecaptured Section 1250 gain, taxed at a maximum rate of 25%.⁵ Recapture applies even if the home was converted back to a primary residence before the sale. Pull the decedent’s older returns to identify any depreciation that was claimed.

Selling Expenses Reduce Gain Before the Exclusion Applies

The estate subtracts legitimate selling costs from the gross proceeds, which reduces the calculated gain before Section 121 is even applied. Real estate commissions, title insurance, transfer taxes, legal fees tied to the sale, and recording fees all qualify.

One trap: a selling expense deducted on the estate’s income tax return can’t also be deducted on the federal estate tax return. The executor picks one. For most estates, which fall well below the federal estate tax exemption (over $13 million per person in 2025), the income tax deduction is the only practical option.

How the Sale Gets Reported

The estate reports the sale on Form 1041, the income tax return for estates and trusts.⁶ The sale details (date acquired, date sold, proceeds, basis) go on Form 8949.⁷ Totals flow to Schedule D (Form 1041), where gain or loss is calculated.⁸

The Section 121 exclusion is applied as an adjustment to reduce the reported gain. Any depreciation recapture is reported separately on Form 4797.⁵ The estate will typically receive a Form 1099-S from the closing agent reporting gross proceeds; that’s the figure Form 8949 needs to reconcile against.

When a surviving spouse sells in their own name rather than through the estate, the sale goes on their Form 1040 with Schedule D and Form 8949, not on the estate’s Form 1041. Getting this filing distinction right matters, especially when the survivor is claiming the $500,000 exclusion the estate itself could not use.

1
Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence
2
eCFR. 26 CFR 1.121-1 – Exclusion of Gain From Sale or Exchange of a Principal Residence
3
eCFR. 26 CFR 1.121-4 – Special Rules
4
Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
5
Internal Revenue Service. Publication 523, Selling Your Home
6
Internal Revenue Service. About Form 1041, U.S. Income Tax Return for Estates and Trusts
7
Internal Revenue Service. About Form 8949, Sales and Other Dispositions of Capital Assets
8
Internal Revenue Service. Instructions for Form 1041 and Schedules A, B, G, J, and K-1