The constitutional court found there was insufficient proof that the men had intended to take a life, which is a condition for a murder, rather than a manslaughter, conviction.
The court sent the case back to a lower court in the capital Berlin, where the landmark verdict was originally handed down in February 2017.
Hamdi H. and Marvin N. were then each sentenced to a maximum jail term of 15 years for their deadly race on February 1st 2016, but can now hope for a lesser conviction of negligent homicide.
The two, aged 24 and 26 at the time, were racing through western Berlin near the city's landmark KaDeWe shopping centre and running a series of red lights when Hamdi H. crashed at 160 kilometres (100 miles) per hour into a jeep.
The jeep's 69-year-old driver was killed instantly as his vehicle was hurled 70 metres (230 feet) down the road.
The prosecution argued that the two young men had casually accepted that they may kill someone, and that the crash car was effectively a “murder weapon”.
The defence lawyers had pleaded for a manslaughter conviction for Hamdi H. and a lesser charge of endangering street traffic for Marvin N.
During the original trial, a psychologist described one of the defendants as “extremely overly self-confident” and said he was determined to “win in order to boost his ego”.
Since the high-profile Berlin case, German laws have been toughened and illegal street races can now be punished by up to 10 years jail.
However, the higher sentences cannot be retroactively applied to the Berlin street race case.