Here we demonstrate that the anomalous magnetic properties of iron oxide nanoparticles are correlated with defects in their interior. We studied the evolution of microstructure and magnetic properties of biphasic core|shell Fe(1-x)O|Fe(3-δ)O4 nanoparticles synthesized by thermal decomposition during their topotaxial oxidation to single-phase nanoparticles. Geometric phase analysis of high-resolution electron microscopy images reveals a large interfacial strain at the core|shell interface and the development of antiphase boundaries. Dark-field transmission electron microscopy and powder X-ray diffraction concur that, as the oxidation proceeds, the interfacial strain is released as the Fe(1-x)O core is removed but that the antiphase boundaries remain. The antiphase boundaries result in anomalous magnetic behavior, that is, a reduced saturation magnetization and exchange bias effects in single-phase nanoparticles. Our results indicate that internal defects play an important role in dictating the magnetic properties of iron oxide nanoparticles.