We report on the synthesis and characterization of V2O5 nanoparticles grown using a sol–gel method at different calcination temperatures. We observed a surprising reduction in the optical band gap from 2.20 to 1.18 eV with increasing calcination temperature from 400 to 500 °C. Raman and X-Ray diffraction measurements indicated slight changes in the lattice parameters induced by the growth process. However, density functional theory calculations of the Rietveld-refined and pristine structures revealed that the observed optical gap reduction could not be explained by structural changes alone. By introducing oxygen vacancies to the refined structures, we could reproduce the reduction of the band gap. Our calculations also showed that the inclusion of oxygen vacancies at the vanadyl position creates a spin-polarized interband state that reduces the electronic band gap and promotes a magnetic response due to unpaired electrons. This prediction was confirmed by our magnetometry measurements, which exhibited a ferromagnetic-like behavior. Our findings suggest that oxygen vacancies play a crucial role in band gap reduction and the promotion of a ferromagnetic-like response in an otherwise paramagnetic material. This provides a promising route to engineer novel devices.