Basal forebrain GABAergic and cholinergic circuits regulate the activity of cholinergic projections to the cortex and hippocampus. Because these projections influence cortical development and function, the development of basal forebrain excitatory and inhibitory neurons is critical for overall brain development. We show that the neurotransmitter phenotype of these neurons is developmentally regulated by neurotrophins and the p75 receptor. Neurotrophins (nerve growth factor and brain-derived neurotrophic factor) increased the number of both cholinergic and GABAergic neurons in neonatal basal forebrain neuron cultures from the region of the medial septum. However, the p75 receptor is required only for neurotrophin-dependent expansion of the GABAergic, not the cholinergic, population. Neurotrophin-induced GABAergic development can be rescued inp75−/−cultures by expression of a p75 rescue construct in neighboring cells or by treatment with medium collected from neurotrophin-treated wild-type cultures. Because p75 is not expressed in basal forebrain GABAergic neurons, this defines a new, non-cell-autonomous mechanism of p75 action in which ligand binding results in release of a soluble factor that modifies neurotrophin responses of nearby neurons. p75 is also required for the maintenance of basal forebrain GABAergic neuronsin vivo, demonstrating that p75-mediated interactions between cholinergic and GABAergic neurons regulate the balance of excitatory and inhibitory components of basal forebrain circuits.