The 22-year-old will join the Portuguese giants for the 2014-15 campaign and the club have an option to make the deal permanent at the end of the season
The 22-year-old joined the European champions from Sao Paulo last summer but was restricted to just 12 league appearances as he struggled to break into Carlo Ancelotti's first-team plans.
Madrid have now allowed Casemiro to join Porto for next season and the Portuguese giants will retain the option to make the deal permanent at the end of the campaign.
"Real Madrid and FC Porto have reached an agreement for the loan of the player Casemiro for the 2014-15 season," a statement from the Spaniards reads.
"Porto reserve an option to buy at the end of the season. If the Portuguese club execute this, Real Madrid will retain an option to buy back the player."
Casemiro, who has been capped five times by Brazil, made 25 senior appearances for Madrid last season.