The cycling of surface water, energy, nutrients, and carbon is different between semiarid grassland and shrubland ecosystems. Although differences are evident when grasslands are compared to shrublands, the processes that contribute to this transition are more challenging to document. We evaluate how surface redistribution of precipitation and plant responses to the resulting infiltration patterns could contribute to the changes that occur during the transition from grassland to shrubland. We measured soil water potential under grasses (Bouteloua eriopoda), shrubs (Larrea tridentata) and bare soil and changes in plant water relations and gas exchange following a 15 mm summer storm in the grassland–shrubland ecotone at the Sevilleta National Wildlife Refuge in central New Mexico USA. Following the storm, soil water potential (Ψs) increased to 30 cm depth beneath both grass and shrub canopies, with the greatest change observed in the top 15 cm of the soil. The increase in Ψs was greater beneath grass canopies than beneath shrub canopies. Ψs under bare soil increased only to 5 cm depth. The substantial redistribution of rainfall and different rooting depths of the vegetation resulted in high Ψs throughout most of the rooting volume of the grasses whereas soil moisture was unchanged throughout a large portion of the shrub rooting volume. Consistent with this pattern, predawn water potential (ΨPD) of grasses increased more than 5 MPa to greater than −1 MPa whereas ΨPD of shrubs increased to −2.5 MPa, a change of less than 2 MPa. Transpiration increased roughly linearly with ΨPD in both grasses and shrubs. In grasses, assimilation was strongly correlated with ΨPD whereas there was no relationship in shrubs where assimilation showed no significant response to the pulse of soil moisture following the storm. These data show that preferential redistribution of water to grass canopies enhances transpiration and assimilation by grasses following large summer storms. This process may inhibit shrubland expansion at the ecotone during periods without extreme drought.