The tumor suppressor gene adenomatous polyposis coli (APC) is mutated in most colorectal cancers (CRC) resulting in constitutive Wnt activation. To understand the Wnt-activating mechanism of APC mutation, we applied CRISPR/Cas9 technology to engineer various APC-truncated isogenic lines. We find that the β-catenin inhibitory domain (CID) in APC represents the threshold for pathological levels of Wnt activation and tumor transformation. Mechanistically, CID-deleted APC truncation promotes β-catenin deubiquitination through reverse binding of β-TrCP and USP7 to the destruction complex. USP7 depletion in APC-mutated CRC inhibits Wnt activation by restoring β-catenin ubiquitination, drives differentiation and suppresses xenograft tumor growth. Finally, the Wnt-activating role of USP7 is specific to APC mutations, thus can be used as tumor-specific therapeutic target for most CRCs.