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The David Beckham-owned MLS franchise Inter Miami had previously submitted an offer for the Colombia international, but he is now expected to embark on the next stage of his career in the Premier League.
James dropped a major hint over his future earlier in August, admitting that a move to England holds great appeal to him during an interview with Mexican motivational speaker Daniel Habif.
"I've already been in several good leagues and the only thing missing isSerie Aand the Premier League, you have to see where I want to go or where they want me to go," he said.
"Going to England would be a good thing, it's a top league."
Ancelotti was the man who convinced theexperienced midfielder to join Madrid in 2014, when he completed a £71m ($93m) move to Santiago Bernabeu from Monaco following a stellar showing at the World Cup finals in Brazil.
However, the Italian head coach was relieved of his managerial duties a year later, and James quickly fell out of favour under Ancelotti's successor, Zinedine Zidane.
James was eventually sent out on loan to Bayern Munich, where he spent two seasons before returning to the Spanish capital last summer.
But he wasunable to force his way back into the Madrid team last term, with a lack of regular opportunities restricting him to just 14 appearances for the club across all competitions.
Rumours of a rift between the former Monaco star and Zidane have swirled throughout the 2020-21 campaign, which ended in La Liga glory for the Blancos.
James has now picked up a total of nine major honours during in his time at the Bernabeu, but he wasn't happy with his limited contribution to Madrid's latest title charge, as he told the 'Realeza del Fútbol Latino'podcast: "I know I have the conditions to always play, but because of other people, I cannotdo it.
"If I were a bad player, I would accept it, but I'm a person who wants to win and always play."