Stem cells are characterized by their capability to self-renew and terminally differentiate into multiple cell types. Somatic or adult stem cells have a finite self-renewal capacity and are lineage-restricted. The use of adult stem cells for therapeutic purposes has been a topic of recent interest given the ethical considerations associated with embryonic stem (ES) cells. Mesenchymal stem cells (MSCs) are adult stem cells that can differentiate into osteogenic, adipogenic, chondrogenic, or myogenic lineages. Owing to their ease of isolation and unique characteristics, MSCs have been widely regarded as potential candidates for tissue engineering and repair. While various signaling molecules important to MSC differentiation have been identified, our complete understanding of this process is lacking. Recent investigations focused on the role of epigenetic regulation in lineage-specific differentiation of MSCs have shown that unique patterns of DNA methylation and histone modifications play an important role in the induction of MSC differentiation toward specific lineages. Nevertheless, MSC epigenetic profiles reflect a more restricted differentiation potential as compared to ES cells. Here we review the effect of epigenetic modifications on MSC multipotency and differentiation, with a focus on osteogenic and adipogenic differentiation. We also highlight clinical applications of MSC epigenetics and nuclear reprogramming.