Determining whether a person with stroke has reached their full potential for recovery is difficult. While techniques such as transcranial magnetic stimulation (TMS) and MRI have some prognostic value, their role in rehabilitation is undefined. This study used TMS and MRI to determine which factors predict functional potential, defined as an individual's capacity for further functional improvement at least 6 months following stroke. We studied 21 chronic stroke patients with upper limb impairment. The functional integrity of the corticospinal tracts (CSTs) was assessed using TMS and functional MRI. The presence or absence of motor-evoked responses (MEPs) to TMS in the affected upper limb, and the lateralization of cortical activity during affected hand use were determined. The structural integrity of the CST was assessed using MRI, and diffusion tensor imaging was used to measure the asymmetry in fractional anisotropy (FA) of the internal capsules. A multiple linear regression analysis was performed, to predict both clinical score at inception and change in clinical score for 17 patients who completed a 30 day programme of motor practice with the affected upper limb. The main findings were that in patients with MEPs, meaningful gains were still possible 3 years after stroke, although the capacity for improvement declined with time. In patients without MEPs, functional potential declines with increasing CST disruption, with no meaningful gains possible if FA asymmetry exceeds a value of 0.25. This study is the first to demonstrate the complementary nature of TMS and MRI techniques in predicting functional potential in chronic stroke patients. An algorithm is proposed for the selection of individualized rehabilitation strategies, based on the prediction of functional potential. These strategies could include neuromodulation using a range of emerging techniques, to prime the motor system for a plastic response to rehabilitation.