Rare-earth (RE) magnesium alloys have attracted lots of attention due to their excellent mechanical properties. In this work, the microstructure and mechanical properties of as-extruded 8.5Gd-4.5Y-0.8Zn-0.4Zr magnesium alloy under different solution treatment were examined with the optical microscope (OM), scanning electron microscope (SEM), high resolution transmission electron microscope (HRTEM), electron back-scattered diffraction (EBSD) and Instron testing machine. The results show that the ES12 alloy (solution treatment for 12 h at 520 °C) has the highest ultimate tensile strength (UTS) of 390 MPa with a fracture elongation of 24.5% at the cost of a minor drop in yielding strength (YS) compared to the as-extruded alloy. During solution treatment, the block-shaped long period stacking ordered (LPSO) in as-extruded alloy evolves into plate-shaped LPSO, which disperses at grain boundaries (GBs), and lamellar LPSO, which distributes in grains. The coexistence of plate-shaped and lamellar LPSO, which impedes the dislocations movement, and the activated <c + a> dislocations are regarded as the primary reasons for mechanical properties improvement. Furthermore, the (11–21) <1–100> texture in as-extruded alloy transforms into the (11–20) <0001> texture in ES12 alloy. The average grain size increases from 3.45 μm in as-extruded alloy to 18.70 μm in ES12 alloy. The Schmid factors of {0001} <11–20>, {10-10} <11–20>, {10–11} <11–20>, and {11–22} <11–23> increase, which indicate that slip systems are more easily activated in plastic deformation. The dynamic recrystallization (DRX) grains fraction increase to 92.8% for ES12 alloy due to the particle-stimulated nucleation (PSN) mechanism triggered by block-shaped and plate-shaped LPSO. The freshly DRXed grains further weaken the texture, and reduce the dislocation density. All of these factors increase elongation of RE magnesium alloy.