/tmp and /var are just memory disks (md0 and md1). On nanoBSD there is nowhere to move them., they live in memory and get created again every boot. The CF card partitions are mounted read-only, and you don't need to mess with that. pfSense mounts them RW when it needs to update the config.
On the CF card there are 2 slices with 2 copies of FreeBSD. When you upgrade, the new version is writtten to the opposite slice. Then the selected slice for boot is swapped, and the system rebooted. It boots from the new slice, and you get the new pfSense+FreeBSD.
The advantage is that, at the console, you can change the boot slice just after the BIOS stuff has run. So you can switch easily between versions if needed. The config is in a partition of its own, accessible from both the other partitions. Take a backup of your config before upgrading, as upgrades usually have some config file conversions, so the config is not always backward portable.
IMHO you should upgrade in-place. It is easy and works. If you have a decent internet connection then use the auto-update from the webGUI. Otherwise, download the upgrade image for your CF card size and use the Manual Update from webGUI to suck it off your local computer and upgrade.
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