The mechanism of N-dealkylation of N-cyclopropyl-N-methylaniline (3) catalyzed by cytochrome P450 (P450) was investigated using density functional theory. This reaction involves two steps. The first one is a Cα–H hydroxylation on the N-substituent to form a carbinolaniline complex, and the second is a decomposition of the carbinolaniline to yield cyclopropanone (or formaldehyde) and N-methylaniline (or N-cyclopropylaniline). Our calculations demonstrate that the first step proceeds in a spin-selective mechanism (SSM), mostly on the low-spin (LS) doublet state. The rate-limiting Cα–H activation is an isotope-sensitive hydrogen atom transfer (HAT) step. The environmental effect switches the regioselectivity of this reaction from a competition between N-decyclopropylation and N-demethylation to a clear preference for N-demethylation. This preference is consistent with former experimental studies. However, it is not in accord with the normal ΔE-BDE correlation since the BDE of Cα–H on the methyl group is higher than that on the cyclopropyl group. Insight into the origin of the preference for N-demethylation reveals that tertiary amine 3 is different from normal hydrocarbons, possessing a unique πPh-πC-N conjugated system. The electron delocalization effect of the πPh-πC-N conjugated system in 3 makes the transition state pose a polar character, and the bulk polarity and hydrogen bonding capability of the protein pocket can exert a remarkable effect on the regioselectivity of N-dealkylation of 3. Decomposition of carbinolaniline is a water-assisted proton-transfer process in the nonenzymatic environment. The ring-intact cyclopropanone formed in the reaction sheds some light on the inability of 3 to inactivate P450 during its N-decyclopropylation.