Tolerance of mouse kidney allografts arises in grafts that develop regulatory tertiary lymphoid organs (rTLOs). Single-cell RNA-seq (scRNA-seq) data and adoptive transfer of alloreactive T cells after transplantation showed that cytotoxic CD8+ T cells are reprogrammed within the accepted graft to an exhausted/regulatory-like phenotype mediated by IFN-γ. Establishment of rTLOs was required because adoptive transfer of alloreactive T cells prior to transplantation results in kidney allograft rejection. Despite the presence of intragraft CD8+ cells with a regulatory phenotype, they were not essential for the induction and maintenance of kidney allograft tolerance since renal allotransplantation into CD8-KO recipients resulted in acceptance and not rejection. Analysis of scRNA-seq data from allograft kidneys and malignant tumors identified similar regulatory-like cell types within the T cell clusters and trajectory analysis showed that cytotoxic CD8+ T cells are reprogrammed into an exhausted/regulatory-like phenotype intratumorally. Induction of cytotoxic CD8+ T cell dysfunction of infiltrating cells appears to be a beneficial mechanistic pathway that protects the kidney allotransplant from rejection through a process we call "defensive tolerance." This pathway has implications for our understanding of allotransplant tolerance and tumor resistance to host immunity.