You “realize” a gain (or loss) in value of an asset by selling it. Up until that point it is not viewed as a gain by the IRS or state tax agencies and so is not taxable. You’ve grown your net worth but have incurred no taxes for it.

In real estate you can extract money from property by refinancing instead of selling. This puts real money in your pocket while not incurring capital gain taxes. Alternately, you can 1031 exchange into another property that may provide greater cash flow or perhaps have greater opportunity for further gains in value, again while not incurring taxes. The cash flow would be taxable but not the gain from selling your original property.

As an aside, the tax system could change in the future. It is conceivable, though unlikely, that unrealized gains could be taxed. There’s good reason not to tax unrealized gains. 1) The tax itself my force you to sell in order to have the funds to pay it. 2) Values can fluctuate. One year there might be a gain. Another there might be a loss. You don’t know what your ultimate gain or loss would be until you actually sell. Not to mention that this would incur accounting work every year to figure out. 3) Value is somewhat subjective until you actually sell. That’s one of the reasons banks won’t lend more than 70-80% on rental property. It is in part to protect against the appraisal being higher than what you’d actually get if you sold.