The Type III TGF-β receptor, betaglycan, is a widely expressed proteoglycan co-receptor for TGF-β superfamily ligands. The full-length protein undergoes ectodomain cleavage with release of a soluble ectodomain fragment. The fate of the resulting transmembrane–cytoplasmic fragment, however, has never been explored. We demonstrate here that the transmembrane–cytoplasmic fragment is stable in transfected cells and in cell lines expressing endogenous betaglycan. Production of this fragment is inhibited by the ectodomain shedding inhibitor TAPI-2. Treatment of cells with inhibitors of the intramembrane protease γ-secretase stabilizes this fragment, suggesting that it is a substrate of γ-secretase. Expression of the transmembrane–cytoplasmic fragment as well as γ-secretase inhibitor stabilization are independent of TGF-β1 or -β2 and are unaffected by mutation of the cytoplasmic domain serines that undergo phosphorylation. γ-Secretase inhibition or the expression of a transmembrane–cytoplasmic fragment in HepG2 cells blunted TGF-β2 signaling. Our findings thus suggest that the transmembrane–cytoplasmic fragment remaining after betaglycan ectodomain cleavage is stable and a substrate of γ-secretase, which may have significant implications for the TGF-β signaling response.