A common observation in tropical dry forests is the habitat preference of tree species along spatial soil water gradients. This pattern of habitat partitioning might be a result of species differentiation in their strategy for using water, along with competing functions such as maximizing water exploitation and tolerating soil water stress. We tested whether species from drier soil conditions exhibited a tolerance strategy compared with that of wet-habitat species. In a comparison of 12 morphophysiological traits in seedlings of 10 closely related dry and wet-habitat species pairs, we explored what trade-offs guide differentiation between habitats and species. Contrary to our expectations, dry-habitat species showed mostly traits associated with an exploitation strategy (higher carbon assimilation capacity, specific leaf area and leaf-specific conductivity and lower water-use efficiency). Strikingly, dry-habitat species tended to retain their leaves longer during drought. Additionally, we detected multiple strategies to live within each habitat, in part due to variation of strategies among lineages, as well as functional differentiation along the water storage capacity–stem density (xylem safety) trade-off. Our results suggest that fundamental trade-offs guide functional niche differentiation among tree species expressed both within and between soil water habitats in a tropical dry forest.