The local crystal and domain structures of K0.5Bi0.5TiO3 ceramics were investigated by transmission electron microscopy (TEM) and selected-area electron diffraction (SAED). The individual grains showed a lamellar domain structure, and on the basis of spot splitting along the characteristic crystallographic directions, 90°a–a- and 90°a–c-type domains were identified. Furthermore, lamellar features within the 90° domains were observed, which we presumed were 180° domains; however, in the case of P4mm structures they cannot be distinguished by SAED. The 90° domain boundaries were (011) and (101) twin planes, typical for tetragonal perovskites. The domains could be designated as rotation twins, where the symmetry element describing the relationship between two twin domains is a twofold twin axis [011]/[101] and the symmetry operation is a 180° rotation. In order to determine the dynamics and the temperature of the phase transformation from the tetragonal to the cubic structures, high-temperature XRD and in situ heating TEM analyses were performed. The results showed a gradual phase transformation in the temperature range from ~280° to ~450°C, where some grains lost their polar domains at a lower temperature than others. These findings confirmed the existence of a binary stability field in which the cubic and tetragonal structures coexist.