The capsaicin receptor (TRPV1), a heat-activated ion channel of the pain pathway, is sensitized by phosphatidylinositol-4,5-bisphosphate (PIP₂) hydrolysis after phospholipase C activation. We identify a site within the C-terminal domain of TRPV1 that is required for PIP₂-mediated inhibition of channel gating. Mutations that weaken PIP₂-TRPV1 interaction reduce thresholds for chemical or thermal stimuli, whereas TRPV1 channels in which this region is replaced with a lipid-binding domain from PIP₂-activated potassium channels remain inhibited by PIP₂. The PIP₂-interaction domain therefore serves as a critical determinant of thermal threshold and dynamic sensitivity range, tuning TRPV1, and thus the sensory neuron, to appropriately detect heat under normal or pathophysiological conditions.