Ab initio molecular orbital method and Monte Carlo (MC) simulation with free energy perturbation (FEP) techniques have been used to study the aza-Wittig reaction of iminophosphoranes (H3PdNH) with formaldehyde (H2CO) in the gas phase and in three different solvents: water, methanol, and tetrahydrofuran (THF). The optimized structures and thermodynamic properties of stationary points for the title reaction system in the gas phase were calculated at the MP2/6-31G** level of theory. The effects of substituents on the reactivity of iminophosphorane were discussed. This aza-Wittig reaction is more favorable for XdH and CH3 than for XdCl in the gas phase. The potential energy profiles along the minimum energy path in the gas phase and in three solvents were obtained. The solvent effects on the H3PdNH + H2CO reaction increase in the order water ≈ methanol>THF, suggesting that the protic polar solvents are more suitable for the aza-Wittig reaction.