I see where you're going with this question. Prior to 1997, you had to purchase a less expensive home within 2 years to avoid being taxed on your home sale.

Now it is as has been stated below. You don't have to roll all of your gains (or any, for that matter) into another house. You certainly can though. There shouldn't be any effects regarding your purchase (whether cheaper or more expensive). It's just that in order to be free from the tax, you can not have gained more than $250,000 if an individual or $500,000 if a couple in your primary residence of at least 2 of the last 5 years.

An expert in that area can help you further, so if there are more questions consult a tax professional.

Sean, Julie was absolutely correct. The rule that you're remembering is when you had to spend at least $1 more or pay capital gains. Now, You only have to live in the house for 3 of the last 5 years to avoid paying taxes on the gain. They do not have to be consecutive years but a total of 36 months.
I hope that makes sense. If not let me know.

Sean,
Julia did a great job in answering your question.
If you are searching for homes in the Nashville area and would like to search the same MLS that we use then please feel free to go to my website and click on "home search".
Have a great week.
Stephen Strickhausen
Keller Williams Realty

As long as you have lived in your present home for two of the last five years you can exclude the capital gains on the sale up to $250,000 ($500,000 for married couples).

I am not a tax professional and you would want to consult your CPA for more information and to make sure that this exclusion will apply in your situation.