Smad1 is a downstream effector of the BMP signaling pathway that binds regulatory DNA to execute gene expression programs leading to, for example, the maintenance of pluripotency in mice. On the contrary, the TGF-beta-activated Smad3 triggers strikingly different programs such as mesodermal differentiation in early development. Because Smad1 and Smad3 contain identical amino acids at the DNA contact interface it is unclear how they elicit distinctive bioactivities. Here, we report the crystal structure of the MH1 domain of Smad1 bound to a palindromic Smad binding element. Surprisingly, the DNA contact interface of Smad1 is drastically rearranged when compared to Smad3. The N-terminal helix 1 of Smad1 is dislodged from its intramolecular binding site and adopts a domain swapped arrangement with a symmetry-related molecule. As a consequence, helix 2 kinks away from the double helix disabling several key phosphate backbone interactions. Thermal melting analysis corroborates a decompacted conformation of Smad1 and DNA binding assays indicate a lower overall affinity of Smad1 to DNA but increased cooperativity when binding to palindromic DNA motifs. These findings suggest that Smad1 and Smad3 evolved differential qualities to assemble on composite DNA elements and to engage in co-factor interactions by remodeling their N-termini.