I inherited a home via a trust and lived in it for 2 years, & sold it. I have K-1 income but want to take sec 121 exemption. How to make this adjustment on my return?

"How to make this adjustment on my return?"

You should consult with a tax professional to determine if the type of trust in question qualifies as a grantor trust.

The only instance where a taxpayer can claim the Section 121 exclusion, when the house is in a trust, is when the trust is a grantor trust (see Treas. Reg. §1.121-1(c)(3)).

It was a revocable living trust until my parents passed away, so it was a Grantor trust, but does that change after death?

It does change; the trust became irrevocable (nongrantor) after they passed. I suggested consulting with a professional because there may be options here if you are the only beneficiary and have lived in the house for 2 out of the last 5 years.

There is one other beneficiary, my sister, but she did not live in the house.

That makes a difference. However, you may not have as much tax liability as you might think.

Your basis in the house is the fair market value as of the date of death of your parents (it doesn't matter that the property was in a grantor trust). So, you may have little or no gain.