Chz1 is a specific chaperone for the histone variant H2A.Z in budding yeast. The ternary complex formed by Chz1 and H2A.Z-H2B dimer is the major in vivo substrate of Swi2/snif2-related 1 (SWR1), the ATP-dependent chromatin remodeling enzyme that deposits H2A.Z into chromatin. However, the structural basis for the binding preference of Chz1 for H2A.Z over H2A and the mechanism by which Chz1 modulates the histone replacement remain elusive. Here, we show that Chz1 utilizes 2 distinct structural domains to engage the H2A.Z-H2B dimer for optimal and specific recognition of H2A.Z. The middle region of Chz1 (Chz1-M) directly interacts with 2 highly conserved H2A.Z-specific residues (Gly98 and Ala57) and dictates a modest preference for H2A.Z-H2B. In addition, structural and biochemical analysis show that the C-terminal region of Chz1 (Chz1-C) harbors a conserved DEF/Y motif, which reflects the consecutive D/E residues followed by a single aromatic residue, to engage an arginine finger and a hydrophobic pocket in H2A.Z-H2B, enhancing the binding preference for H2A.Z-H2B. Furthermore, Chz1 facilitates SWR1-mediated H2A.Z deposition by alleviating inhibition caused by aggregation of excess free histones, providing insights into how Chz1 controls the bioavailability of H2A.Z to assist SWR1 in promoter-specific installation of a histone mark. Our study elucidates a novel H2A.Z-recognition mechanism and uncovers a molecular rationale for binding of free histone by specialized histone chaperones in vivo.