Royals' title-winning boss received the prestigious honour at the LMA's 20th annual awards dinner in London's Old Billingsgate on Monday night.
Voted for by fellow managers, McDermott, 51, was the clear winner ahead of Southampton's Nigel Adkins, Birmingham City's Chris Hughton, Cardiff City's Malky Mackay and Watford's Sean Dyche.
Despite a poor start to the season, McDermott led a remarkable recovery that ended with Reading claiming the Championship title with one game to spare to secure promotion to the Premier League for the second time in the club's history.
LMA chairman, Howard Wilkinson, said: "There is no doubt that the LMA annual awards are perceived as the most accurate measure of a manager's ability because there are no better judges of your performance than your peers."
McDermott, 51, is the second Reading manager to pick up the LMA award in recent years after ex-boss Steve Coppell in 2005/06.
Richard Bevan, chief executive of the LMA, added: "This is a celebration of this season's managerial achievements across the top four leagues in the professional game. To receive votes from and to be acknowledged by your fellow managers and competitors is a great honour."
There were strong Reading connections at Monday's awards, with ex-Royals boss Alan Pardew - the man who hired McDermott back in 2000 - picking up the Premier League's Manager of the Year.
Among Pardew's rivals was ex-Royals manager and current Swansea City boss Brendan Rodgers.
LMA Awards 2012:
Barclays Premier League Manager of the Year - Alan Pardew, Newcastle United.
Barclays Community Sports Award - Ros Cramp.
Npower Football League 2 Manager of the Year - Paolo Di Canio, Swindon Town.
Npower Football League 1 Manager of the Year - Chris Powell, Charlton Athletic.
Npower Football League Championship Manager of the Year - Brian McDermott, Reading.
Budweiser FA Cup Manager of the Year - Roberto Di Matteo, Chelsea.
LMA Special Merit Award sponsored by npower - Lee Clark, Huddersfield Town.
LMA Service to Football Award sponsored by npower - St John Ambulance.
LMA Manager of the Year sponsored by Barclays - Alan Pardew, Newcastle United.