Magnetic polyurethane elastomer nanocomposites were prepared by incorporating pure and thiodiglycolic acid (TDGA) surface-modified Fe3O4 nanoparticles into polyurethane matrix using in situ polymerization method. Surface modification of Fe3O4 nanoparticles was carried out to enhance the dispersion of the nanoparticles in polyurethane matrix. Pure and TDGA surface-modified Fe3O4 nanoparticles were synthesized by coprecipitation method and characterized by Fourier Transform Infrared Spectroscopy, X-ray diffraction, and Vibrating Sample Magnetometer. The morphology and dispersion of the nanoparticles in the magnetic polyurethane elastomer nanocomposites were studied by Scanning Electron Microscope. It was observed that surface modification of Fe3O4 nanoparticles with TDGA enhanced the dispersion of the nanoparticles in polyurethane matrices. Furthermore, effect of surface modification of Fe3O4 nanoparticles on thermal and mechanical properties of magnetic polyurethane elastomer nanocomposite was investigated by thermogravimetric analysis, dynamic mechanical thermal analysis, and an Instron type Tensile Tester. It was concluded that surface modification of Fe3O4 nanoparticles allowed preparation of the magnetic nanocomposites with better mechanical properties. Moreover, study of fibroblast cells interaction with magnetic nanocomposites showed that the products can be a good candidate for biomedical application due to their in vitro biocompatibility and non-toxicity.