Identification and manipulation of transition-metal ion impurities in oxide nanoparticles require an in-depth understanding of their stability, segregation behavior, and, at the same time, knowledge about their surface reactivity. Powders of magnesium oxide nanoparticles with admixtures of iron or cobalt ions, as two next neighbors in the periodic table, were synthesized in the gas phase via injection of metal−organic precursors into the magnesium combustion flame followed by temperature quenching of resulting nanocrystals in argon. In these model systems of cubic nanocrystals, we explored the distinct stability of these impurities in great detail. While Co 2+ ions keep their divalent valence state and substitute the host ions in the cationic sublattice, Fe 3+ ions emerge due to the energy gain provided by charge compensation and impurity−vacancy complex formation. The very different behavior of Co and Fe ions in the MgO host lattice, their changes in the local environment, and the different trends in segregation have been investigated by means of X-ray absorption and photoelectron spectroscopies and structure characterization techniques. Abundance and energetics of the defects and defect complexes were determined within the framework of the density functional theory and enabled us to explain consistently the reported experimental observations. Oxidation state and nature of the defect cluster have a significant impact on particle size and annealing-induced morphology evolution, which determine their material properties as components in heterogeneous catalysis and functional ceramics.