Selling a residence quickly due to the birth of a baby can net a tax break: A reduced home-sale exclusion.

Taxpayers who have owned and used a home as their principal residence for at least two of the five years leading up to the sale can exclude up to $250,000 ($500,000 if married) of the gain when they sell the place. In this situation, a couple with a daughter bought a condo which had two small bedrooms. The daughter's bedroom also acted as a guest room and a home office for the husband. After the purchase, the wife became pregnant and later gave birth to another child. The family moved and sold the condo at a gain less than two years after buying it. 

Unforeseen circumstances caused the home sale, IRS says in a private ruling. So even thought the two-out-of-five-years use and ownership tests weren't satisfied, the sellers can claim a percentage of the $500,000 exclusion equal to the portion of the two-year period that they owned and used the condo as their primary home.