Hoffenheim said the 38-year-old, who is also the son of former Hertha Berlin boss Dieter, has signed until June 2023.
Sebastian Hoeness led Bayern’s reserves to an unexpected third division title this season.
“Sebastian has impressively proved that he can train young players into a powerful unit and develop them individually. He chose an offensive approach that was not only attractive but also extraordinarily successful,” Hoffenheim sports director Alexander Rosen said in a statement.
Hoeness succeeds Dutchman Alfred Schreuder, who was sacked in June after a series of poor performances for the club owned by billionaire Dietmar Hopp.
Under a six-man interim coaching staff, Hoffenheim won their last three games to grab sixth place and a place in the Europa League.
Hoeness, who played three games for Hoffenheim when the club was still in the third division, will begin working with the squad when they start pre-season training on August 2.
“Working at Hoffenheim is a great challenge, which I look forward to. The basic philosophy of the club is the same as my idea of football: offensive, courageous, flexible and always active,” said the new coach, who is bringing in another Bayern coach David Krecidlo as his assistant.