Following TGFβ receptor–mediated phosphorylation and association with Smad4, Smad2 moves into the nucleus, binds to target promoters in association with DNA-binding cofactors, and recruits coactivators such as p300/CBP to activate transcription. We identified the homeodomain protein TGIF as a Smad2-binding protein and a repressor of transcription. A TGFβ-activated Smad complex can recruit TGIF and histone deacetylases (HDACs) to a Smad target promoter, repressing transcription. Thus, upon entering the nucleus, a Smad2–Smad4 complex may interact with coactivators, forming a transcriptional activation complex, or with TGIF and HDACs, forming a transcriptional repressor complex. Formation of one of these two mutually exclusive complexes is determined by the relative levels of Smad corepressors and coactivators within the cell.