Hello again Pat,
As I mentioned in my REVISED first response, the trust itself is not eligible for the exclusion, but since the spouse was granted a life interest in the property, he is eligible to take the exclusion as outlined in my response prior to this one.
Following is what I wrote in my first response:
(3) Ownership— (i) Trusts. If a residence is owned by a trust, for the period that a taxpayer is treated under sections 671 through 679 (relating to the treatment of grantors and others as substantial owners) as the owner of the trust or the portion of the trust that includes the residence, the taxpayer will be treated as owning the residence for purposes of satisfying the 2-year ownership requirement of section 121, and the sale or exchange by the trust will be treated as if made by the taxpayer.
Reference to IRC Section 671-679 can be found at the following link:
As this is a Grantors Trust, the sale of the property is reported by the applicable individual on their tax return, not by the trust. SEE BELOW:
There are two exceptions to the general rule. First, if the grantor has retained an interest in the trust (e.g., right of revocation) or if some other person is given a general power of appointment over the trust income or principal, trust income is taxable to the grantor or powerholder. These are known as grantor−type trusts−−an example is the revocable trust where all income is taxed to the grantor.
Second, if the trust is a charitable remainder trust because the charity is tax exempt, retained trust income is generally not taxable to the trust, but any distributions are taxed to the beneficiaries.