The Sec 121 gain exclusion can apply to a home held in a revocable trust, under certain conditions. The key factor is whether the individual(s) who established the trust (the grantor or grantors) are considered the owners of the trust for tax purposes. With a revocable trust, the grantor typically retains the right to revoke or amend the trust, which means the grantor is treated as the owner of the trust's assets for income tax purposes.

For the Sec 121 exclusion to apply, the home must meet the ownership and use tests. This means the home must have been owned and used as the individual’s principal residence for at least two out of the five years preceding the sale. When a home is held in a revocable trust, and the grantor is considered the owner for tax purposes, the IRS typically allows the grantor to apply the Sec 121 exclusion to the sale of the home, assuming the other requirements are met.

However, complications can arise when one spouse dies and the trust becomes irrevocable, or if the trust is split into multiple trusts. See Irrevocable Trusts and the Sec 121 Home Gain Exclusion next.