TFS Application Tier Will Use the Same Hardware It's Using Right Now (RTM)

To do an in-place upgrade of Team Foundation Server

 Double Check. Verify that the operating system and hardware meet the requirements for the new version of Team Foundation Server. New for this version of TFS, you must use a 64-bit server if you use a server operating system.

Determine the service account you will use for Team Foundation Server. By default, TFS uses Network Service, but you can also use a domain account. In most cases, you should use the same account you used for the previous installation or consider using Network Service.

Tip: If you’re using SQL Server 2008 R2 Enterprise edition, you have to update to cumulative update package 1 for SQL Server 2008 R2 Service Pack 1 (or a later version) to address a SQL Server issue with table compression. If you’re using SQL Server 2008 R2 Standard edition or SQL Server 2012, you don’t have to update SQL Server.

There’s more information on MSDN: System Requirements for Team Foundation Server, or Accounts Required for Installation of Team Foundation Server.

 Uninstall TFS. Use Control Panel to completely uninstall Team Foundation Server. If SharePoint Products is running on a computer other than Team Foundation Server, you have to uninstall the TFS Extensions for SharePoint from the SharePoint server, too. If SharePoint Products is on the TFS application tier, don’t worry. We uninstall the TFS Extensions for SharePoint at the same time that we remove the old version of TFS.

 Upgrade TFS. Run the Team Foundation Server install from the product DVD and then use the Upgrade Configuration wizard to upgrade your installation. But wait—if SharePoint is running on a computer other than Team Foundation Server, you’ll first want to install the new TFS Extensions for SharePoint on the SharePoint server. Similar to the previous step, if SharePoint  is on the TFS application-tier, we’ll  install the Extensions for SharePoint at the same time that we set up the new version of TFS. Make sure the account you’re going to use as the service account for TFS is a member of the Farm administrators group on SharePoint.

For more information: Run TFS Upgrade Wizard

Next Step: Set up a new build machine

After you upgrade the application tier, you might want to install the new build service. You can’t use TFS 2010 build service with Team Foundation Server 2012, but you can install the new build service side-by-side on the same server as the TFS 2010 build service.