It's capped as @SC Maintenance mentioned. So imagine living in California for 40 yrs where you have $1M in equity and no mortgage. You should move but you're going to pay tax on part of the proceeds from sale. The tax acts as a deterrent.I may be off base but believe any appreciation on your primary home, if lived in for 2 of the past 5 years, is tax free? Are there localities that don't treat it this way?
The exemption covers the first $250k for single and $500k for married