With the Yankees exercising the $5 million buyout, the first baseman/designated hitter becomes a free agent.
Encarnacion, who missed most of the final two months of this season with an oblique injury, had 34 home runs, 86 RBIs and a .244 batting average. After he was traded from the Cleveland Indians to the Seattle Mariners in the offseason, he was again traded to the Yankees in June.
He started 57 games at first base this season. Encarnacion, who turns 37 in January, missed nearly a month of action with a fractured right wrist and again landed on the injured list late in the season with an oblique strain.
The three-time All-Star hit .249 with 13 homers, 37 RBIs and an .856 OPS in 44 regular-season games with New York.
Also, the Yankees said UCL reconstruction surgery for outfielder Aaron Hicks went as expected on Wednesday.
The Associated Press contributed to this report.