Alonso, who created history during the 2023-2024 season by breaking the Bayern Munich monopoly to lift the Bundesliga trophy with Leverkusen, is set to sign a reported three-year deal with Los Blancos, where he will be tasked with putting the side back on top both domestically and on the continent.
His contract with the German side was set to run until 2026, but both parties have mutually decided to terminate it earlier than scheduled.
He is in line to replace Ancelotti, who looks set to take on the Brazil national side ahead of next year's World Cup. The Italian has been in post with Real Madrid since 2021 and during his second spell with the club, led them to two LaLiga titles, two Champions League trophies, as well as other honours.
They will be big shoes to fill for Alonso, if the move materialises, with the pressure always high in the Spanish capital. He is no stranger to this, having played there for five years, making 236 appearances and scoring six goals, including time under Ancelotti during the Italian's first spell.
In a statement, Bayer Leverkusen said: "Together with Xabi Alonso we have written a success story just through winning the league title without defeat in a way not seen in German football," said Werner Wenning, chair of the shareholders committee at Bayer 04.
"He was an outstanding ambassador at all times as coach both for our club as well as for the whole Bundesliga. Therefore, we are very grateful to Xabi Alonso."
Alonso added: "I owe great thanks to Bayer Leverkusen, my players and staff, all the employees of the club and last but not least the fantastic fans. Our success was the result of an outstanding team performance.
"This club, who showed exceptional trust in me, very much deserved to win the German league title for the first time. My thanks and admiration go to everybody who helped to make this triumph happen, including the DFB Pokal win in Berlin.
"Bayer are ready for the future. The positive path will continue and I will be excited to follow it."
Alonso takes over a Real Madrid side that will be bolstered by the imminent signing of Liverpool right-back Trent Alexander-Arnold, who is set to move during the summer on a free transfer. His first assignment could be the Club World Cup, which starts on June 15th in the US. Real Madrid will face Al Hilal, Pachuca and RB Salzburg in the group stage.
Bayer Leverkusen, after winning the league and cup double last year, are set to finish second in the Bundesliga behind perennial rivals Bayern this season.