Lateral move or downsize are two different transactions. Capital gains has no effect on the second one.
People who are complaining about the capital gains taxes pretending that such taxes prevent them from either moving laterally or downsizing are complaining that other properties also appreciated in price. What they would have preferred is that their property appreciated and the properties they wanted to move to did not.
This gets even worse if you want to buy a larger house (if appreciation is percentage based).
In the second case:
You bought a house for $50k, which in a year appreciated to $100k. You sell the house for $100k, pay the capital gains of X% on the $50k of appreciation which gets you $100k - ($50k * X% ) to play with.
You lateral move would not be to a house worth $100k, it would be to a house worth $100k-($50k * X%) because you d not have $100k, you only have $100 - (50k * X%).
If you wanted to defer capital gains and play with entire 100k, then instead of doing a sale you would do 1031 exchange.
Of course it does. A loss is a loss. It doesn't matter whether it comes out of your checking account or your home equity.
> What they would have preferred is that their property appreciated and the properties they wanted to move to did not.
That's generally not an option if you want to move locally.
> That's generally not an option if you want to move locally.
You don't get to have your cake ( gain money on a sale of appreciated house) and eat it too ( buy at the price before the appreciation )