German art collector Cornelius Gurlitt, whose collection was seized by police in 2012, has reached an agreement on the future of the 1,400 works.
The 81-year-old says he will co-operate with authorities to determine which of the paintings were stolen by Nazis during WW2, and enable their return.
Any works which go undisputed will be returned to him within a year.
The collection, which includes pieces by Picasso and Matisse is estimated to be worth $1.35bn (£846m; 989m euros).
More than 1,400 works were seized from Mr Gurlitt's flat in Munich two years ago during a routine tax investigation.
A further 60 pieces were discovered in his house near Salzburg, Austria, earlier this year.
Experts say many of the works were previously thought to have been lost or destroyed.
Initially, Mr Gurlitt said he would not give up the paintings voluntarily.
He also denied any of the works had been looted during the war, adding: "I only wanted to live with my pictures, in peace and calm."
Officials have said for months they would like to reach an agreement with the collector who, in February, filed an appeal against the artworks' seizure.
His change of heart was announced in a joint press release with the Bavarian Justice Ministry and the German culture minister's office on Monday.
"Mr Gurlitt will allow the Task Force to continue researching the provenance of those works in the trove suspected of having been confiscated from their owners by the Nazis or of being works the Nazis considered 'degenerate art'," it said,
"However, the Task Force aims to complete the main substance of its provenance research within a year."
Works on which background research has not been completed within a year "will be returned to Mr Gurlitt", the statement continued, but he will continue to grant access for further work.
All works whose history isn't being examined "will be returned to him promptly" said Gurlitt's lawyer, Christoph Edel.
Mr Edel said his client had "demonstrated exemplary moral responsibility" in reaching the agreement.
In a separate development, earlier on Monday, a second person came forward to claim a Matisse painting that was part of Mr Gurlitt's collection.
The new claim on the artist's Femme Assise will temporarily delay its planned return to the heirs of a deceased Paris-based art collector.
Mr Edel said authorities were legally obligated to investigate the new claim before the painting could be handed over.
Under current German law, Cornelius Gurlitt is not compelled to return any paintings to their owners as he is protected by a Statute of Limitations, which negates any claim for incidents that happened more than 30 years ago.
This means that, even if it was proved the works were looted by the Nazis, Mr Gurlitt could have kept them. He has now waived that right, and agreed to act in accordance with the Washington Principles, which state that: "If the pre-War owners of art confiscated by the Nazis can be identified - or their heirs - steps should be taken to achieve a just and fair solution."
This clears the way for the restitution of dozens, maybe hundreds, of artworks to their rightful owners.