With the development of China’s national economy from the middle- and low-income stages to the middle- and high-income stages, the function of homesteads has undergone a significant evolution. Clarifying the evolution laws, characteristics, and dynamic mechanisms of various functions of homesteads can provide a basis for revitalizing the use of idle homesteads and promoting rural economic development. It can also provide theoretical guidance for implementing the Rural Revitalization Strategy. This paper uses statistical data and household survey data to establish a theoretical analytical framework for the functional evolution of rural homesteads under the background of changes in national economic-income levels. This study adopts comprehensive index model evaluation methods, participatory rural assessments, and participatory rural-mapping methods. This study reveals the characteristics and driving mechanism of the functional evolution of homesteads at different stages of economic development in China and verifies it from a microscale through typical rural homestay villages. The results show that the functional evolution of rural homesteads in China has apparent stages. In the middle- and low-income stages, the basic functions of the rural homestead are the living function, agricultural-production function, and social-security function. In the middle- and high-income stages, the living function, the nonagricultural-production function, and the asset function are the main functions. The functional evolution of rural homesteads is driven by both macro and micro factors. The multifunctional use of rural homesteads can fully activate the use rights of homesteads, realize the appreciation of the functional value of rural homestead assets, and provide primary power for rural social and economic development. Furthermore, it can play an essential role in China crossing the “middle-income trap”. The research results provide evidence for understanding the functional evolution law of rural homesteads and contribute to the rural geography of multifunctionality.