Heterochromatin is a specialized form of chromatin that restricts access to DNA and inhibits genetic processes, including transcription and recombination. In Neurospora crassa, constitutive heterochromatin is characterized by trimethylation of lysine 9 on histone H3, hypoacetylation of histones, and DNA methylation. Here we explore whether the conserved histone demethylase, lysine-specific demethylase 1 (LSD1), regulates heterochromatin in Neurospora, and if so, how. Though LSD1 is implicated in heterochromatin regulation, its function is inconsistent across different systems; orthologs of LSD1 have been shown to either promote or antagonize heterochromatin expansion by removing H3K4me or H3K9me respectively. We identify three members of the Neurospora LSD complex (LSDC): LSD1, PHF1, and BDP-1, and strains deficient for any exhibit variable spreading of heterochromatin and establishment of new heterochromatin domains dispersed across the genome. Heterochromatin establishment outside of canonical domains in Neurospora share the unusual characteristic of DNA methylation-dependent H3K9me3; typically, H3K9me3 establishment is independent of DNA methylation. Consistent with this, the hyper-H3K9me3 phenotype of LSD1 knock-out strains is dependent on the presence of DNA methylation, as well as HCHC-mediated histone deacetylation, suggesting spreading is dependent on some feedback mechanism. Altogether, our results suggest LSD1 works in opposition to HCHC to maintain proper heterochromatin boundaries.