Freyberg House, which sustained significant damage in the November 14 earthquake, will be demolished and rebuilt.
AMP Capital, which owns the building, made the announcement on Friday.
Defence House sits on Aitken St in Thorndon and was occupied by the New Zealand Defence Force (NZDF) and the Ministry of Defence (MOD).
"An extensive investigation by our team of expert engineers has concluded that Defence House does not present any immediate health and safety risk.
"However, AMP Capital has decided the demolition and complete rebuild of the building is the best way forward as the cost of repairs is not economically viable," the company said in a statement.
The company has formally notified Defence NZ and have offered to rebuild based on their specifications.
Since the quake, critical headquarters for both the NZDF and MOD have operated out of the Freyberg Building, which is immediately behind Defence House.
By April they expect 900 staff to be based in the building.
In a statement on Friday the NZDF said the loss of the building "will be sad" for staff.
"However, our people are what makes a headquarters and we continue to work together to deliver for the NZDF and for New Zealand."
They are considering long-term accommodation options for the NZDF and MOD in Wellington, while they work out of their interim accommodation.
The Public Service Association has welcomed the decision to knock the building down, and they're glad staff know what is happening.
"We are pleased to finally have some certainty around the future of Defence House," PSA national secretary Glenn Barclay says.
"Since the earthquake, NZDF and MoD staff have been located in temporary premises across the region and this will allow them to get back to work and plan for the future.
"We question why the decision on the building's future took so long, but realise this was in the hands of the landlords.
"We look forward to working with NZDF towards a more resilient set-up for its Wellington operations."