A key question in arid and semiarid environments is: How do variable rainfall and nitrogen availability affect nitrogen cycling? We studied the interaction of N availability, soil microsite, and rainfall event size and frequency on the effect of N2O production in a semiarid grassland in central New Mexico. Interspace and grass canopy soil samples (top 5 cm) were collected and placed in serum vials. Vials with each soil type (interspace or grass) received nitrogen and rainfall treatments in a factorial design. Vials either received zero or 2 kg/m2 nitrogen (ammonium nitrate). Each vial was watered from 1 to 6 times with different rainfall event sizes, such that each vial received a total of 180 mm of water. Gas samples were taken weekly and analyzed for N2O on a gas chromatograph fitted with an electron capture detector. Our results show that all factors and interactions influenced N2O production. N2O flux was significantly higher in interspaces than under grass canopy. N2O was highest under nitrogen addition and with one large rainfall event rather than numerous smaller events. These findings suggest that N2O flux is highly episodic with a strong rainfall event size threshold, high spatial variability, and high dependence on nitrogen availability.