I am not a tax expert but I have heard that as long you put the appreciation money back into a house purchase, you can keep all the appreciation upto 500K tax free.
Yup, if married and you've been there a couple of years. $250k if single.
Still, almost anyone who bought a house a few years ago in the area is sitting on at least $500k in gains. So even if taxes on the remainder are arguably fair from a revenue perspective, they are another constraint on housing market liquidity.
There's two scenarios in which one can avoid or delay taxation when his home has appreciated:
1) $250k deduction if single ($500k deduction if married) during the year in which the capital gains has occurred.
2) Convert the property to a business and use a 1031 Like Kind Exchange in which 100% of the profits can be rolled into a new property and deferred until that property is liquidated or the gains are realized.
For 1), you must have owned the home for 2+ year to qualify. If you're moving under 2 years for a "qualified reason" (death, birth of multiples, 50+ miles closer to work) you can take a pro-rated deduction.
For 2), you cannot do a like-kind exchange for residential property that you live in as your primary home.
Still, almost anyone who bought a house a few years ago in the area is sitting on at least $500k in gains. So even if taxes on the remainder are arguably fair from a revenue perspective, they are another constraint on housing market liquidity.