The rural collective land system plays an important role in urbanization; however, it hinders the capitalization of rural homesteads. Despite the significance of this system, the existing literature mainly focused on debates on privatization and nationalization of rural homesteads. However, only a few studies have proposed feasible plans for capitalizing fixed assets. To fill this research gap, this study discusses the conflict between market demand and legal limitation of the marketization of rural homesteads. The weaknesses and strengths of radical nationalization and privatization are also comprehensively evaluated. The concept of market-driven nationalization is proposed to overcome the weakness of radical nationalization and privatization while maintaining their strengths as much as possible. Finally, an assessment of the proposed market-driven nationalization is conducted based on an institutional analysis and development (IAD) framework. The key contribution of this study is its investigation into whether radically changing the rural collective land system is appropriate in contemporary China. In addition, this study proposes a potentially feasible path for advancing the capitalization of rural homesteads.