If I sell my house and file Chapter 7 afterwards, does the $40,000 exemption still apply?

That depends on which state's exemptions laws apply to your case.  Some states (such as California) allow the exemption to apply after sale of a house if you buy a replacement house within a certain period of time after.   To see more on which state's exemption laws would apply to your case, visit http://www.bklaw.com/exemptions.html or have a consultation with a bankruptcy lawyer in your area.