An estate can claim the Section 121 exclusion for estates and shelter up to $250,000 of gain when selling a decedent’s primary residence. The statute itself doesn’t say so directly — the provision that once spelled this out was repealed in 2010 — but the IRS confirmed in Revenue Ruling 2014-18 that an estate steps into the decedent’s shoes for the ownership and use tests. Paired with the stepped-up basis that inherited property receives, many estates owe little or no capital gains tax on a home sale. The details, though, decide whether the exclusion actually helps.
How an Estate Qualifies
Under Revenue Ruling 2014-18, the estate counts the decedent’s time owning and living in the home toward Section 121’s two-year ownership and use requirements. If the decedent owned and used 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.1Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence
The maximum exclusion for an estate is $250,000, matching the single-taxpayer limit. Even if the decedent was married, the estate is its own taxpayer and gets the individual cap.
The Timing Window Is Tighter Than It Looks
No hard deadline for estate sales appears in the statute, but the math creates a practical one. The exclusion requires two years of qualifying use within the five-year period ending on the sale date. Once the decedent dies, no one is accumulating additional use (the estate cannot “use” a residence), so the clock on the decedent’s qualifying period is running down within that five-year lookback.
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 window. That’s the best case. If the decedent spent their final year in a hospital or with family, the available window shrinks. Executors who let the property sit for years while the estate winds through probate sometimes discover they’ve lost the exclusion entirely — not because of any deadline, but because the math stopped working.
When the Decedent Lived in a Care Facility
Many people spend their final months or years in a nursing home or assisted living facility, which raises an obvious question about the use test. The regulations provide relief. If the decedent became physically or mentally unable to care for themselves, time spent in a state-licensed care facility counts as use of the home, as long as the decedent actually lived in the home as a primary residence for at least one year (not two) during the five-year lookback.2eCFR. 26 CFR 1.121-1 – Exclusion of Gain From Sale or Exchange of a Principal Residence
That reduced one-year threshold matters a great deal in estate sales. A decedent who lived at home for 14 months and then spent the remaining three years of life in a nursing home still qualifies. The entire nursing home period is treated as residence in the home, satisfying the two-year use test.
Stepped-Up Basis Often Does the Real Work
Before worrying about the exclusion, check whether there’s even any gain to exclude. When someone dies, their property receives a stepped-up basis: the cost basis resets to fair market value on the date of death.3Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent If the decedent bought the home for $150,000 thirty years ago and it was worth $450,000 at death, the estate’s basis is $450,000. Any gain is measured from that stepped-up value.
If the estate sells relatively quickly and the local market hasn’t moved dramatically, the sale price and the stepped-up basis may be close enough that little or no gain exists. The Section 121 exclusion then becomes the backup, mattering most when values rise meaningfully between the date of death and the sale date.
Establishing the stepped-up basis requires a reliable fair market value as of the date of death. In practice, that means a professional appraisal. The IRS can challenge the values reported on an estate or income tax return, so keeping documentation of the appraisal method and the appraiser’s qualifications protects the estate if questions arise later.
Surviving Spouse: Up to $500,000
A surviving spouse selling in their own name, rather than through the estate, can potentially claim the full $500,000 joint exclusion. The statute allows this if the sale happens within two years of the spouse’s death, the surviving spouse hasn’t remarried by the sale date, and neither spouse used the exclusion on a different home sale within the prior two years.1Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence
The surviving spouse can also tack the deceased spouse’s ownership and use periods to satisfy the two-year requirements, which matters when the survivor moved into the home relatively recently.4eCFR. 26 CFR 1.121-4 – Special Rules If the deceased spouse owned and lived in the home since 2015 and the couple married in 2025, the survivor can count the deceased spouse’s years toward the tests even though they personally lived there for less than two years.
The choice between the estate selling and the surviving spouse selling is where real money gets left on the table. If the home has significant appreciation, routing the sale through the surviving spouse rather than the estate can double the available exclusion. That’s a conversation worth having with a tax professional before the executor lists the property.
Heirs and Revocable Trusts
A beneficiary who inherits the home cannot tack the decedent’s ownership and use the way the estate can. The 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 the Section 121 exclusion. An heir who moves into the inherited home and lives there as a primary residence for two years can qualify on their own merits, but that’s based on the heir’s own use.
For homes held in a revocable living trust, the analysis depends on whether the trust makes a Section 645 election to be treated as part of the estate for tax purposes. Revenue Ruling 2014-18 concluded that a qualified revocable trust making that election can claim the exclusion on the same terms as the estate, tacking the decedent’s ownership and use. Without the election, the trust’s ability to claim the exclusion is less certain. If the home is held in a revocable trust, the trustee should discuss the Section 645 election with a tax advisor before selling.
Rental or Business Use Complications
If the decedent rented out the home or used part of it for business at any point after 2008, the estate faces two complications that can reduce the exclusion.
First, any period of “nonqualified use” after January 1, 2009 — time when the property wasn’t used as a primary residence — reduces the excludable gain proportionally. The gain allocated to nonqualified use is calculated by dividing the total nonqualified-use period by the total ownership period. If the decedent owned the home for 20 years but rented it out for 4 years after 2008, roughly 20% of the gain would fall outside the exclusion.
Second, depreciation claimed during any rental or business-use period after May 6, 1997 cannot be excluded under Section 121 regardless of the nonqualified-use calculation. That depreciation must be recaptured as unrecaptured Section 1250 gain, taxed at a maximum rate of 25%.5Internal Revenue Service. Publication 523, Selling Your Home This recapture applies even if the home was converted back to a primary residence before the sale. The estate should gather the decedent’s old tax returns to identify any depreciation that was claimed.
Selling Expenses That Reduce Gain
The estate can subtract legitimate selling expenses from the gross proceeds, reducing the taxable gain before the exclusion even applies. Deductible costs include real estate agent commissions, title insurance, transfer taxes, legal fees related to the sale, and recording fees. These expenses reduce the amount realized, which directly reduces the calculated gain.
One trap: selling expenses claimed as a deduction on the estate’s income tax return cannot also be deducted on a federal estate tax return. The executor must choose one or the other for each expense. For most estates that don’t owe federal estate tax (the exemption is over $13 million per person in 2025), the income tax deduction is the only practical option.
Reporting the Sale
When the estate sells the home, the transaction is reported on Form 1041, the income tax return for estates and trusts.6Internal Revenue Service. About Form 1041, U.S. Income Tax Return for Estates and Trusts The individual sale details — date acquired, date sold, proceeds, and basis — go on Form 8949.7Internal Revenue Service. About Form 8949, Sales and Other Dispositions of Capital Assets The totals from Form 8949 flow to Schedule D (Form 1041), where the gain or loss is calculated.8Internal Revenue Service. Instructions for Form 1041 and Schedules A, B, G, J, and K-1
The Section 121 exclusion is applied as an adjustment reducing the gain reported on Schedule D. Any depreciation recapture gets reported separately on Form 4797.5Internal Revenue Service. Publication 523, Selling Your Home The estate will typically also receive a Form 1099-S from the closing agent reporting the gross proceeds, which Form 8949 needs to reconcile.
If a surviving spouse is selling the home individually rather than through the estate, the sale goes on their personal Form 1040 with Schedule D and Form 8949, not on the estate’s Form 1041. Getting this filing distinction right matters, especially when the surviving spouse is claiming the $500,000 exclusion the estate couldn’t claim.