Sarvam Khalvidam Brahma is Chandogya Upanishad (III.14.1.) A better translation is - All this is Brahman. Swami Nikhilananda in his translation, says that this chapter, chapter 14 (which consists of 4 verses) -"The present chapter describes the meditation on Saguna Brahman without a physical symbol." The verse reads (Swami Gambhirananda translator):
All this is Brahman. (This) is born from, dissolves in, and exits in That. Therefore, one should meditate by becoming calm. Because a person is identified with (his) conviction, (therefore) just as the conviction a man has in this world, so does he become after departing from here. Therefore he should shape his conviction.
Another translation of the same verse by Swami Nikhilananda:
All this is Brahman, From It the universe comes forth, in It the universe merges, and in It the universe breathes. Therefore a man should meditate on Brahman with a calm mind.
Now, verily, a man consists of will. As he will in the world, so does he become when he has departed hence. Let him (with this knowledge in mind) form his will.
The last part of this verse is an echo of Asthvakra Samhita (1.11) Swami Nityaswarupananda translator:
He who considers himself free is free indeed, and he who considers himself bound remains bound. 'As one thinks, so one becomes' is a popular saying in this world, and it is quite true.
So the Upanishad says that all this universe is Brahman. We, however, do not see the universe as Brahman. Brahman has been compared to the desert and the world as a mirage in the desert. The desert is real, in seeing the mirage we do not see the desert, we see the mirage. In a mother of pearl shell we see silver, but it is not really silver, it is really just shell.
Swami Vivekananda says (Complete Works V7, p 33; available here under the heading Inspired Talks, sub-heading Saturday, July 6 - http://cwsv.belurmath.org/volume_7/vol_7_frame.htm):
Om tat sat! According to Shankara, there are two phases of the universe, one is I and the other thou; and they are as contrary as light and darkness, so it goes without saying that neither can be derived from the other. On the subject, the object has been superimposed; the subject is the only reality, the other a mere appearance. The opposite view is untenable. Matter and the external world are but the soul in a certain state; in reality there is only one.
All our world comes from truth and untruth coupled together. Samsâra (life) is the result of the contradictory forces acting upon us, like the diagonal motion of a ball in a parallelogram of forces. The world is God and is real, but that is not the world we see; just as we see silver in the mother-of-pearl where it is not. This is what is known as Adhyâsa or superimposition, that is, a relative existence dependent upon a real one, as when we recall a scene we have seen; for the time it exists for us, but that existence is not real. Or some say, it is as when we imagine heat in water, which does not belong to it; so really it is something which has been put where it does not belong, "taking the thing for what it is not". We see reality, but distorted by the medium through which we see it.
We see Brahman, but It is distorted through the lens of Maya. For a detailed explanation of Adhyâsa, see Sankara's explanation in the section titled Adhyâsa or Superimposition at the beginning of Sankara's commentary on the Brahma Sutras available here - http://www.wisdomlib.org/hinduism/book/brahma-sutras/d/doc62753.html