But this year they were knocked out by Juventus in the Champions League semi-finals, while Barcelona won La Liga.
Ancelotti's side finished second in Spain's top flight, two points behind Barca, who have reached the Spanish Cup and Champions League finals.
Club president Florentino Perez told a news conference it had "not been an easy decision" before thanking Ancelotti and adding that a new manager would be appointed "next week".
"What did Ancelotti do wrong? I don't know," Perez added. "The demands here at Real Madrid are very high. The affection that the players and the fans have for Carlo is the same as the affection I myself have for him."
Napoli boss Rafael Benitez is the favourite to take over the vacant role once the Italian season ends.
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