The tall striker, who at 29 won his first international caps as part of the Confederations Cup-winning team earlier this month, scored 11 times and set up four goals in his 31 league matches last season.
Hoffenheim finished fourth -- their best ever showing -- and will play in the Champions League qualifying rounds.
"Sandro is a great finisher and added new components to our game last season," said Hoffenheim coach Julian Nagelsmann.
"He keeps opponents busy, he pushes team mates and is also an important personality in the changing room."
Wagner came through the Bayern Munich youth ranks but failed to earn a regular spot in the senior team and after spells at half a dozen clubs he signed for Hoffenheim in 2016.
(Reporting by Karolos Grohmann; Editing by Ken Ferris)
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