The legislation had been welcomed by tenants, but panned by developers and landlords since it came into force in February 2020.
Since then, the rents of around 1.5 million flats in Berlin had theoretically been frozen at June 2019 rates.
The court ruled on Thursday that the Berlin government had overstepped its powers in introducing the law, as federal law governing rents was already in place.
Previous federal laws had "attempted to ensure a fair balance between the interests of tenants and lessors, interests that are protected by fundamental rights" meaning that "the [German states] are precluded from passing rent legislation in this regard," an English statement from the court said.
The Berlin rent cap was therefore "void in its entirety."
The court decision means that rents that had been reduced in line with the law can now go back up.
Many thousands of tenants may also be required to backpay their rent from the months since the Berlin legislation came into force.
Introduced by a left-wing coalition
The rent cap was unique to the German capital, where a left-wing coalition has been in power under Mayor Michael Mueller.
Mueller had this year described the law as a necessary "breather" for tenants struggling to deal with the soaring cost of renting property in the city.
The challenge in the Constitutional Court was originally brought by centre-right CDU and CSU parties and the liberal FDP party, who argued that the city government had exceeded its powers.
The FDP welcomed the ruling on Thursday as "good news."
FDP lawmaker and housing expert Daniel Foest said the Berlin Senate had "exploited renters in Berlin for an ideological experiment, and it had failed."
Shares in major property firm Deutsche Wohnen rose sharply after the decision.
