The Blues will receive an initial £14million for the midfielder, who joined the club as an eight-year-old before progressing through the academy, with a further £3m in add-ons.
Loftus-Cheek, 27, underwent his medical in Milan on Thursday before his signing was announced.
A Chelsea statement read: “We wish Ruben the very best as he begins this next chapter in his career.”
The departure takes Chelsea’s total sales for the summer towards the £140million mark after Kalidou Koulibaly, Kai Havertz, Edouard Mendy and Mateo Kovacic were also allowed to leave.
Milan will hope to take that figure a touch higher with a deal for Christian Pulisic, although the Italians are understood to have placed a limit of paying £17m for the American winger.
Chelsea are also set to bank in the region of £60m for Mason Mount, who is set to undergo a medical with Manchester United next week.
