Promoting farm household sustainability is a key issue in the agricultural transformation of developing countries. However, whether land reallocation through farmland rent-in ultimately translates into improvements in economic returns, consumption welfare, and the capacity to cope with risks depends on the institutional conditions in which farmland rental is embedded. Using survey data collected in 2022 from 1439 farm households in western China, this study draws on transaction cost theory to measure village-level farmland rental market development (FRMD) across four transaction stages: information search, negotiation, contracting, and enforcement. It then examines how FRMD shapes the effects of farmland rent-in on farm household sustainability. The results show that FRMD significantly strengthens the positive effects of farmland rent-in on agricultural income, household consumption, and household livelihood resilience. Mechanism analysis provides empirical evidence consistent with three potential channels: improvement in farmland rent-in quality, traditional input structure adjustment, and modern farm management capability enhancement. Specifically, improvement in farmland rent-in quality is reflected in greater spatial contiguity and contractual stability. Traditional input structure adjustment involves increased hired labor input and more mechanized operations. Modern farm management capability enhancement includes financing structure optimization, technological capability enhancement, organizational participation, and marketing channel expansion. Heterogeneity analysis shows that these strengthening effects are primarily observed among households with broadband access. This study reveals how the farmland rental market, as an institutional setting, shapes the realization of potential gains from land reallocation. It provides empirical evidence from China on the relationship between factor market institutions and farm household sustainability in developing countries.