But many homes are owned in a revocable living trust.  Many of these trusts were written back in the time when there was no portability of the spouse's exclusion, so they provided "when the first dies, split the trust into two new trusts, and one is irrevocable."  Some of them would provide, "but don't put the primary residence into that trust, because of adverse tax consequences."  Meanwhile, others just have cookie-cutter boilerplate verbiage that results in problems like this.  

So, first question, who owned the house?  A trust?  What does the trust say about what happens when the first spouse dies?  How did you determine the stepped-up basis of the house?  Did its value increase in the "less than two years" from death to sale?