I have a website on wordpress.com. Is there a way to download it to my localhost, customize it and then upload it back to wordpress.com?
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WordPress com doesn't allow you to upload any customization, other than CSS via their paid customization feature.
Notably you can download WordPress com themes (link is available in sidebar of theme info page) and use them in self hosted installation. However, given that WP com doesn't provide source for much of its environment, it's unlikely that you would be able to replicate features and customization process precisely.
In a nutshell you need to go with self hosted installation for real freedom of customization.