Extracellular proTGF-β is covalently linked to "milieu" molecules in the matrix or on cell surfaces and is latent until TGF-β is released by integrins. Here, we show that LRRC33 on the surface of microglia functions as a milieu molecule and enables highly localized, integrin-αVβ8-dependent TGF-β activation. Lrrc33^−/− mice lack CNS vascular abnormalities associated with deficiency in TGF-β-activating integrins but have microglia with a reactive phenotype and after 2 months develop ascending paraparesis with loss of myelinated axons and death by 5 months. Whole bone marrow transplantation results in selective repopulation of Lrrc33^−/− brains with WT microglia and halts disease progression. The phenotypes of WT and Lrrc33^−/− microglia in the same brain suggest that there is little spreading of TGF-β activated from one microglial cell to neighboring microglia. Our results suggest that interactions between integrin-bearing cells and cells bearing milieu molecule-associated TGF-β provide localized and selective activation of TGF-β.