you may be able to use facts and circumstances to satisfy one of the three acceptable reasons for the sale to obtain a partial exclusion. assuming you both occupied this home as your principal residence for 19 months in the 2 years ending on the date before the sale you could qualify for an exclusion of 19/24 of $500,000. this assumes that neither of you has used the home sale exclusion on another home in the 2 year period ending on the date of sale of this one.
factors that may be relevant in determining the primary reason for sale include the following IRS REG 1.121-3(b)
the suitability of the property as the taxpayer's main home materially changed (unforeseen circumstance).
the 3 acceptable reasons are
1) change in place of employment. the new place of employment is at least 50 miles farther from the taxpayers' old home than the former place of employment was.
2) health
3) unforeseen circumstances.
I certainly would recommend that you consult with a tax pro in your area to go over your situation. "unforeseen circumstances" is at the discretion of the IRS should they inquire. in other words, would the IRS deem starting a family being an unforeseen circumstance. many families live in cramped quarters.
another thing to consider is what will your gain be? depending on your overall tax situation in the year of sale the gain could be taxed at 0% for federal. if your state has an income tax there could be state taxes.
