ABSTRACT Cholesterol is an essential component of metazoan cellular membranes and it helps to maintain the structural integrity and fluidity of the plasma membrane. Here, we developed a cholesterol biosensor, termed D4H, based on the fourth domain of Clostridium perfringens theta-toxin, which recognizes cholesterol in the cytosolic leaflet of the plasma membrane and organelles. The D4H probe disassociates from the plasma membrane upon cholesterol extraction and after perturbations in cellular cholesterol trafficking. When used in combination with a recombinant version of the biosensor, we show that plasmalemmal phosphatidylserine is essential for retaining cholesterol in the cytosolic leaflet of the plasma membrane. In vitro experiments reveal that 1-stearoy-2-oleoyl phosphatidylserine can induce phase separation in cholesterol-containing lipid bilayers and shield cholesterol from cholesterol oxidase. Finally, the altered transbilayer distribution of cholesterol causes flotillin-1 to relocalize to endocytic organelles. This probe should be useful in the future to study pools of cholesterol in the cytosolic leaflet of the plasma membrane and organelles.