The joke by Vine, 47, scooped almost one-fifth of the votes in the competition run by comedy television channel Dave.
The winning one-liner was: "I decided to sell my Hoover ... well, it was just collecting dust."
It is the first time the award has been presented to a previous winner. Vine triumphed in 2010 with the joke: "I've just been on a once-in-a-lifetime holiday. I'll tell you what, never again."
Vine was also runner-up in 2011, 2012 and 2013.
On being crowned this year's winner, Vine said: "I'm a little bit surprised but very delighted. This is the second time I've won this award but I guess nobody loves a repeat more than Dave."
To find the favourite joke, 10 judges scoured the festival's venues for a week before nominating their three favourite jokes. They were then put to the public vote, with 2,000 people choosing the 10 they found funniest.
The runner-up was Masai Graham, with the gag: "I've written a joke about a fat badger, but I couldn't fit it into my set."
Three female comedians also feature in this year's top 10 as jokes from Bec Hill, Ria Lina and Felicity Ward tickled the nation's funny bone, reflecting the overall reported 62% rise of women performing at this year's Fringe on last year.
:: The 10 funniest jokes from the Fringe Festival 2014.
1. "I've decided to sell my Hoover ... well, it was just collecting dust" - Tim Vine.
2. "I've written a joke about a fat badger, but I couldn't fit it into my set" - Masai Graham.
3. "Always leave them wanting more, my uncle used to say to me. Which is why he lost his job in disaster relief" - Mark Watson.
4. "I was given some Sudoku toilet paper. It didn't work. You could only fill it in with number 1s and number 2s" - Bec Hill.
5. "I wanted to do a show about feminism. But my husband wouldn't let me" - Ria Lina.
6. "Money can't buy you happiness? Well, check this out, I bought myself a Happy Meal" - Paul F Taylor.
7. "Scotland had oil, but it's running out thanks to all that deep frying" - Scott Capurro.
=8. "I forgot my inflatable Michael Gove, which is a shame 'cause halfway through he disappears up his own arsehole" - Kevin Day.
=8. "I've been married for 10 years, I haven't made a decision for seven" - Jason Cook.
10. "This show is about perception and perspective. But it depends how you look at it" - Felicity Ward.
"Honourable mentions", which just missed out on the top spots.
:: "I go to the kebab shop so much that when they call me boss in there it's less a term of affection, more an economic reality" - Ed Gamble.
:: "Leadership looks fun, but it's stressful. Just look at someone leading a conga" - James Acaster.
:: "I bought myself some glasses. My observational comedy improved" - Sara Pascoe.