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Tau is an abundant microtubule-associated protein in neurons. Tau aggregation into insoluble fibrils is a hallmark of Alzheimer’s disease and other dementias, yet the physiological state of tau molecules within cells remains unclear. Using single molecule imaging, we directly observe that the microtubule lattice regulates reversible tau self-association, leading to localized, dynamic condensation of tau molecules on the microtubule surface. Tau condensates form selectively permissible barriers, spatially regulating the activity of MT severing enzymes and the movement of molecular motors through their boundaries. We propose that reversible self-association of tau molecules, controlled by the microtubule, is an important mechanism of tau’s biological functions, and that oligomerization of tau is a common property shared between the physiological and disease forms of the molecule.