Reports had claimed that the Italians were keen to keep the holding midfielder permanently, but the deadline for a transfer has now passed without a resolution being thrashed out
The 26-year-old spent the past season in the Italian capital, making 30 appearances in Serie A for the Giallorossi, who had to notify his parent club by June 1 if they wanted to retain the midfieler beyond the expiration of his loan stint.
However, the deadline has passed with Roma not presenting an offer to the Liga champions, and the Argentina international will now head back to Madrid where he is seemingly surplus to requirements, with an array of other midfielders above him in pecking order.
Reports earlier on Saturday had suggested that the Olimpico outfit were weighing up the idea of including him in an exchange deal that would have seen Pablo Osvaldo go in the opposition direction, but that particular deal now seems dead.
It has also been claimed that Luis Enrique's departure from Roma put an end to any chance of a transfer, while incoming boss Zdenek Zeman does not see Gago as part of his plans.
Roma finished a disappointing eighth in the Italian top flight in the 2011-12 term and will look to rebuild for the upcoming campaign. Gago, meanwhile, is on international duty with Argentina.