Closely related, ecologically similar species are often separated at small geographic scales while being broadly sympatric. Both adaptation to abiotic environmental conditions and a variety of biotic interactions may determine small‐scale allopatry. In Northern California's coast range, two monkeyflower species, Mimulus guttatus and Mimulus nudatus, can co‐occur within local sites but rarely overlap at fine spatial scales, even though they are often separated by less than 1 m. M. guttatus naturally grows in wetter areas and is often submerged for up to four months of the year, while M. nudatus naturally occupies drier sites. We used a combination of observational data, reciprocal transplant, and laboratory experiments to test a series of biotic and abiotic hypotheses for the observed distribution pattern. Although M. guttatus can tolerate dry hillside conditions like those in which M. nudatus occurs, M. nudatus is unable to survive submerged for more than a week, limiting its distribution from seasonal streams inundated for months and dominated by M. guttatus. While herbivores did not differentially damage species, transplants were more likely to be damaged in M. guttatus’ seep habitat and M. nudatus was less tolerant to herbivory. Individuals of each species transplanted into populations of heterospecific congeners produced large proportions (up to 80%) of inviable seeds resulting from increased hybridization rates in close sympatry. Mimulus nudatus’ inability to tolerate submergence and herbivory establishes some degree of habitat association, and then, hybrid seed inviability reduces the ability of the locally rarer species to persist within the congener's microhabitat and maintains habitat segregation. Together these data show that both environmental filtering and biotic interactions shape the fine‐scale distribution of close relatives.