The inverse problem of determining unsaturated soil hydraulic properties from one‐dimensional, transient infiltration and redistribution events is analyzed. Hydraulic properties are assumed to be described by an extension of van Genuchten's (1980) model which allows for hysteresis in the retention function and air entrapment. Unknown parameters in the model are estimated from observed water contents and heads during transient flow by numerical inversion of the unsaturated flow equation. The inverse problem is formulated as a weighted least squares problem and solved using an efficient Levenberg‐Marquardt algorithm. The flow event consists of ponded infiltration followed by gravity drainage with evaporation at the soil surface. Sensitivity analyses indicate that observations during ponded infiltration should be made near the position of the wetting front. The location of observation points during the drying stage is less critical than during the infiltration stage, but for the relatively high imposed evaporative flux sensitivity of pressure head is highest near the soil surface. Large differences in sensitivity are observed among the various model parameters. Unknown evaporative fluxes are approximated in the inverse solution as an equivalent first‐type boundary condition requiring only periodic measurements of surface water content during the drying stage. Little error is incurred provided accurate measurements are possible. Corruption of input data with random error is shown to have a larger effect on the predicted conductivity function than on the retention function and more effect on the wetting branch of the hysteretic retention function than on the drying. When measurements are subject to error and the assumed parametric model for water retention and conductivity relations is not exact, it may no longer be possible to detect hysteresis in the retention function.