When you sell the house with a large equity, you must consider the tax implication.  We strongly recommend that you discuss about the tax with your CPA before you sell the house.  There may be some advantageous methods to deal with taxes.  Some of the methods require that you do not touch the proceed from the sale.  Once you get the proceed from the sales, however, you may not have many choices. 

Another consideration is where you will get the smaller house.  In some location, the smaller house may be as expensive as your current house.

For people 55 and older, there is a one time eligibility to transfer the property tax  of your original home based upon Proposition 60/90.