The decision comes a day after Austria's parliament passed a law allowing it to seize the house following years of controversy.
Owner Gerlinde Pommer had repeatedly refused to sell the building in Braunau am Inn, or allow renovations.
There had been calls for the building to be pulled down to prevent it becoming a shrine for neo-Nazis.
But on Thursday Interior Minister Wolfgang Sobotka, who had previously said he wanted to see it demolished, Braunau mayor Johannes Waidbacher and provincial governor Josef Puehringer met and decided to keep the building.
In a statement, the three said keeping it standing would be "a life-affirming message" and "a clear symbol against the crimes committed by Hitler".
Mr Puehringer added that destroying the structure where the Nazi dictator was born in 1889 would have fuelled accusations of "tearing down a piece of burdensome history".
Instead, officials want to remodel the property's facade to eliminate its draw, and are offering it to Lebenshilfe, a charity which supports people with learning difficulties.
The building had previously been used by the charity as a day centre and workshop for people with special needs.
But it was forced to move out several years ago when Mrs Pommer blocked renovations.
The former inn remained empty for many years, while the government paid Mrs Pommer a generous rent in an attempt to prevent the three-storey building being used as a site for neo-Nazi tourism.
Hitler was born in a rented room on the top floor of the building, near the Austro-German border, on 20 April 1889.
During Nazi rule, the house was transformed into a shrine to Hitler as the town drew in a wave of tourists.
But as the Nazis began to lose control in 1944, it was shut up.
Locals say it still attracts neo-Nazi sympathisers to Braunau am Inn, despite the efforts of local authorities to prevent this.
Mrs Pommer will now be given compensation.