AbstractDermal Fibroblast Progenitors (DFPs) differentiate into distinct fibroblast lineages during skin development. However, the epigenetic mechanisms that regulate DFP differentiation are not known. Our objective was to use multimodal single‐cell approaches, epigenetic assays, and allografting techniques to define a DFP state and the mechanism that governs its differentiation potential. Our initial results indicated that the overall transcription profile of DFPs is repressed by H3K27me3 and has inaccessible chromatin at lineage‐specific genes. Surprisingly, the repressive chromatin profile of DFPs renders them unable to reform the skin in allograft assays despite their multipotent potential. We hypothesized that chromatin derepression was modulated by the H3K27me3 demethylase, Kdm6b/Jmjd3. Dermal fibroblast–specific deletion of Kdm6b/Jmjd3 in mice resulted in adipocyte compartment ablation and inhibition of mature dermal papilla functions, confirmed by additional single‐cell RNA‐seq, ChIP‐seq, and allografting assays. We conclude that DFPs are functionally derepressed during murine skin development by Kdm6b/Jmjd3. Our studies therefore reveal a multimodal understanding of how DFPs differentiate into distinct fibroblast lineages and provide a novel publicly available multiomics search tool.