Sleep is an active state critical for processing emotional memories encoded during waking in both humans and animals. There is a remarkable overlap between the brain structures and circuits active during sleep, particularly rapid eye-movement (REM) sleep, and the those encoding emotions. Accordingly, disruptions in sleep quality or quantity, including REM sleep, are often associated with, and precede the onset of, nearly all affective psychiatric and mood disorders. In this context, a major biomedical challenge is to better understand the underlying mechanisms of the relationship between (REM) sleep and emotion encoding to improve treatments for mental health. This lecture will summarize our investigation of the cellular and circuit mechanisms underlying sleep architecture, sleep oscillations, and local brain dynamics across sleep-wake states using electrophysiological recordings combined with single-cell calcium imaging or optogenetics. The presentation will detail the discovery of a 'somato-dendritic decoupling'in prefrontal cortex pyramidal neurons underlying REM sleep-dependent stabilization of optimal emotional memory traces. This decoupling reflects a tonic inhibition at the somas of pyramidal cells, occurring simultaneously with a selective disinhibition of their dendritic arbors selectively during REM sleep. Recent findings on REM sleep-dependent subcortical inputs and neuromodulation of this decoupling will be discussed in the context of synaptic plasticity and the optimization of emotional responses in the maintenance of mental health.