from the regulations
(e) Sale or exchange by reason of unforeseen circumstances -
(1) In general. A sale or exchange is by reason of unforeseen circumstances if the primary reason for the sale or exchange is the occurrence of an event that the taxpayer could not reasonably have anticipated before purchasing and occupying the residence.
After discovering we had infertility issues, we started the process of becoming licensed to foster children Sept. 2020. We moved into our home and officially closed on the sale Dec. 2020. February of 2021 we had 2 older children (siblings) placed with us through foster care.
this seems inconsistent with the reg. but this is only one factor.
reg 1.121-3
(b) Primary reason for sale or exchange. In order for a taxpayer to claim a reduced maximum exclusion under section 121(c), the sale or exchange must be by reason of a change in place of employment, health, or unforeseen circumstances. If a safe harbor described in this section applies, a sale or exchange is deemed to be by reason of a change in place of employment, health, or unforeseen circumstances. If a safe harbor described in this section does not apply, a sale or exchange is by reason of a change in place of employment, health, or unforeseen circumstances only if the primary reason for the sale or exchange is a change in place of employment (within the meaning of paragraph (c) of this section), health (within the meaning of paragraph (d) of this section), or unforeseen circumstances (within the meaning of paragraph (e) of this section). Whether the requirements of this section are satisfied depends upon all the facts and circumstances. Factors that may be relevant in determining the taxpayer's primary reason for the sale or exchange include (but are not limited to) the extent to which -
(1) The sale or exchange and the circumstances giving rise to the sale or exchange are proximate in time; this seems to apply to your situation
(2) The suitability of the property as the taxpayer's principal residence materially changes; this seems to apply to your situation
(3) The taxpayer's financial ability to maintain the property is materially impaired; no
(4) The taxpayer uses the property as the taxpayer's residence during the period of the taxpayer's ownership of the property; this seems to apply to your situation
(5) The circumstances giving rise to the sale or exchange are not reasonably foreseeable when the taxpayer begins using the property as the taxpayer's principal residence; to me and a big question mark
(6) The circumstances giving rise to the sale or exchange occur during the period of the taxpayer's ownership and use of the property as the taxpayer's principal residence. this seems to apply to your situation
the IRS does not require that all six factors be met, so my opinion is you would qualify for the partial exclusion. I am not the IRS and others may disagree with me.
the only way to make sure is to request an IRS Letter Ruling
