Agroforestry has been promoted as a promising model of rural development in Lao PDR (Laos), where much upland land use is in transition. Relatively little is known about the contributions of agroforestry systems to Lao farmers’ livelihoods, how these systems compare to alternatives, or the extent to which they might contribute to the national policy objective of replacing swidden agriculture. The consequences of customary land tenure for such transitions in Laos are also poorly understood. We investigated independent adoption by farmers in a Central Lao village of an agroforestry system that combines ‘yang bong’ (Persea kurzii) trees on 7-year rotations with intercrops of rice and bananas. The returns to land from this agroforestry system were more financially rewarding for farming households than swidden cultivation, demonstrating that farmers can develop land use intensification pathways that replace swidden cultivation. However, case study farmers anticipated further expansion of banana monocrops rather of agroforestry systems. In addition, the adoption of the agroforestry system has fostered wealth differentiation in the case study village, reflecting both prior and emerging inequities in the customary land tenure system. Our results indicate that it is important to closely understand the institutional and livelihood contexts of agroforestry systems, to better appreciate their role and potential in supporting sustainable land use transitions. In this case study, the intersection of customary land use practices, national policy goals and land allocation policies, new market opportunities, and farmers’ dynamic livelihood strategies, both define and constrain the contribution of agroforestry to land use transitions.