Selling your house is and isn't against the ToS. If you sell your house for a price near your purchase value, then GMs will leave you alone. If you attempt to sell your house at a significantly inflated price and get reported the GMs will punish you. See this thread for the details.

Your biggest challenge is going to be finding a seller for the new Medium plot than finding a willing buyer for your small plot.
The cleaner purchase method is actually Buy / Sell the entire FC. That way there is no demolition and land re-purchase cost.