In my house, we do a lot of "switching out." Meaning, because we have limited space, we don't keep all of our toys, books, stuffed animals, etc. in the bedrooms at the same time. I like to think that even if we did have more space, we would still do this, because I feel like it cuts down on clutter and that my kids play with more if they have less out.
Remember that show Clean Sweep? One thing I remember Peter Walsh would always stress is that you only have the space that you have. Period. And you have to make the things that you have in the room fit in the space you have, not the space you wish you had. Each of my kids has one bin for books (you can see them in this post - one is hot pink and one is blue). They can only keep enough books in the house to fill their bin. All the other books get stored in the garage, and they can "switch out" when they want to. If they go out to feed the dog and stumble across a book they want to bring in, they have to take one out.
Although it's tempting to go through my kids' stuff when they're at playdates (and sometimes I do), I believe that involving them in this process from the very beginning teaches them valuable skills. My daughter just turned 4, and she's been doing this herself for a while. She's surprisingly good at evaluating what she loves and uses the most, what can go out to the garage for a while, and what she can give away.
She's great at doing this with clothes, shoes, toys, books, and stuffed animals. The only thing I CANNOT figure out how to downsize is artwork/schoolwork. She claims it is ALL special to her, and can't part with anything. Any great suggestions?