Methylation of CpG island promoters is an epigenetic event that can effectively silence transcription over multiple cell generations. Hypermethylation of the Rasal1 promoter contributes to activation of fibroblasts and progression of kidney fibrosis. Here, we explored whether such causative hypermethylation could be reversed through endogenous mechanisms and whether such reversal of hypermethylation is a constituent of the antifibrotic activity of bone morphogenic protein 7 (BMP7). We show that successful inhibition of experimental kidney fibrosis through administration of BMP7 associates with normalization of Rasal1 promoter hypermethylation. Furthermore, this reversal of pathologic hypermethylation was achieved specifically through Tet3-mediated hydroxymethylation. Collectively, our findings reveal a new mechanism that may be exploited to facilitate therapeutic DNA demethylation to reverse kidney fibrosis.