Reserve teams in Spain play in the same league system as their senior team rather than a separate league. Reserve teams, however, cannot play in the same division as their senior team. Therefore, Real Madrid Castilla are ineligible for promotion to the Primera División. Reserve teams are also no longer permitted to enter the Copa del Rey. In addition, only under-23 players, or under-25 players with a professional contract, can switch between senior and reserve teams.
In 1948, Agrupación Deportiva Plus Ultra, a local amateur team, then playing in the Tercera División, agreed to become a feeder club for Real Madrid. Originally formed in 1930, the team took its name from the national motto of Spain. Real gave AD Plus Ultra financial support and in return were given first refusal on the club's best players. By 1949, they made their debut in the Segunda División and in 1952, the club became the official Real reserve team. In 1959, they reached the quarter-finals of the Copa del Rey, losing 7–2 on aggregate to eventual finalists Granada.
In 1991, the Royal Spanish Football Federation banned the use of separate names for reserve teams and Castilla CF became known as Real Madrid Deportiva and then Real Madrid B. In the early 1990s, two former Castilla players, Vicente del Bosque and Rafael Benítez, began their coaching careers with the team. In 1997, the team was relegated to the Segunda División B, but despite this, they continued to produce internationally acclaimed players. These have included Raúl, Guti and Iker Casillas, who all became established members of the senior Real Madrid team.
In the 2004–05 season, coach Juan Ramón López Caro guided the team back to the Segunda División and the team subsequently revived the El Castilla name and became known as Real Madrid Castilla. In 2006, the new stadium of the club's training facilities Ciudad Real Madrid was named the Alfredo Di Stéfano Stadium and Francisco Moreno Cariñena became the first independent chairman in 16 years. In this year, the team also has continued to produce quality players such as Roberto Soldado and Álvaro Arbeloa.
In the 2006–2007 season, the team was relegated to the Segunda División B under the management of ex-Real Madrid legend Míchel after occupying 19th place in the league in a disappointing season. Míchel received a lot of criticism and accepted all the blame for the team's bad performances, especially for those who had a wonderful season in the 2005–06 season, such as Rubén de la Red, Esteban Granero and Javi García. The reserves produced other quality players, including Juan Mata and Álvaro Negredo.
Real Madrid Castilla was promoted back to Segunda División at the end of the season 2011–12 after beating Cádiz in the play-offs with aggregate score 8–1.
The capacity of the main stand at the west is 4,000 seats, with additional 2,000 seats at the eastern stand, giving the stadium a total capacity of 6,000 seats. It is envisaged to increase the seating capacity up to 25,000 at the completion of the expansion.