The 24-year-old, who has won the Bundesliga in each of the last two seasons, had been one of Manchester United's principal transfer targets this summer.
However, United were unable to agree terms with both the player and Bayern over a deal.
And that allowed Los Blancos to swoop for the midfielder, who had just one year left on his contract at the Allianz Arena, and who will be presented as a Real Madrid player later today at the Santiago Bernabeu.
"We thank Toni Kroos for his time in Munich," said Karl-Heinz Rummenigge, Bayern's chief executive.
"We have achieved here with him great success. We wish him and his family all the best in Madrid and Real."
Kroos, who has 51 international caps to his name, leaves Bayern after an eight year association with Germany's biggest club, during which time he made 185 appearances for the club.
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