Transforming growth factor beta 1 (TGF-β1) induces pulmonary fibrosis by enhancing epithelial apoptosis and affects the enzymatic activity of transglutaminase 2 (TG2). The aim of this study was to determine the role of TG2 in TGF-β1-induced lung remodeling and alveolar macrophage modulation. We characterized the in vivo effects of TGF-β1 and TG2 on lung inflammation, fibrosis, and macrophage activity using transgenic C57BL/6 mice with wild and null TG2 loci. The effect of TG2 inhibition on in vitro TGF-β1-stimulated alveolar macrophages was assessed through mRNA analysis. TG2 was remarkably upregulated in the lungs of TGF-β1 transgenic (TGF-β1 Tg) mice, especially in alveolar macrophages and epithelial cells. In the absence of TG2, TGF-β1-induced inflammation was suppressed, decreasing the number of macrophages in the bronchoalveolar lavage fluid. In addition, the alveolar destruction and peribronchial fibrosis induced by TGF-β1 overexpression were significantly reduced, which correlated with decreases in the expression of fibroblast growth factor and matrix metallopeptidase 12, respectively. However, TG2 deficiency did not compromise the phagocytic activity of alveolar macrophages in TGF-β1 Tg mice. At the same time, TG2 contributed to the regulation of TGF-β1-induced macrophage activation. Inhibition of TG2 did not affect the TGF-β1-induced expression of CD86, an M1 marker, in macrophages, but it did reverse the TGF-β1-induced expression of CD206. This result suggests that TG2 mediates TGF-β1-induced M2-like polarization but does not contribute to TGF-β1-induced M1 polarization. In conclusion, TG2 regulates macrophage modulation and plays an important role in TGF-β1-induced lung inflammation, destruction, and fibrosis.