The ability to generate heat under an alternating magnetic field (AMF) makes magnetic iron oxide nanoparticles (MIONs) an ideal heat source for biomedical applications including cancer thermoablative therapy, tissue preservation, and remote control of cell function. However, there is a lack of quantitative understanding of the mechanisms governing heat generation of MIONs, and the optimal nanoparticle size for magnetic fluid heating (MFH) applications. Here, we show that MIONs with large sizes (>20 nm) have a specific absorption rate (SAR) significantly higher than that predicted by the widely used linear theory of MFH. The heating efficiency of MIONs in both the superparamagnetic and ferromagnetic regimes increased with size, which can be accurately characterized with a modified dynamic hysteresis model. In particular, the 40 nm ferromagnetic nanoparticles have an SAR value approaching the theoretical limit under a clinically relevant AMF. An in vivo study further demonstrated that the 40 nm MIONs could effectively heat tumor tissues at a minimal dose. Our experimental results and theoretical analysis on nanoparticle heating offer important insight into the rationale design of MION-based MFH for therapeutic applications.