Allen was born near Lexington, Kentucky, and his youth there during the Ante-bellum, Civil War, and Reconstruction periods heavily influenced his writing. He graduated from Transylvania University in 1872, delivering the Salutatorian address in Latin. In 1893 Allen moved to New York City, where he lived until his death. He was a contributor to Harper's Magazine, The Atlantic Monthly, and other popular magazines of the time. His novels include The Choir Invisible, which was a very popular best seller in 1897.
Allen is buried in Lexington Cemetery. At the northern edge of Gratz Park in Lexington is the "Fountain of Youth", built in memory of Allen using proceeds willed to the city by him.James Lane Allen School, an elementary school off Alexandria Drive in Lexington, Kentucky is named in his honor.