The invention discloses a high-toughness rare earth heat-resistant magnesium alloy. The high-toughness rare earth heat-resistant magnesium alloy comprises the following chemical components of, in percentage by mass, 8.0%-10.8% of Gd, 3.1%-4.0% of Y, 1.8%-2.2% of Zn, 0.4%-0.5% of Zr and the balance magnesium and inevitable impurity elements, the invention further discloses a preparation method of the high-toughness rare earth heat-resistant magnesium alloy, the preparation method sequentially comprises the following steps of (1) preparing a magnesium alloy casting rod; (2) homogenization of the bar, specifically, heating a magnesium alloy bar and preserving heat by adopting a grading homogenization system, then heating and reheating, preserving heat and carrying out homogenization treatment; (3) upsetting-extruding composite deformation, specifically, putting the bar into a heated upsetting-extruding composite die, and obtaining a high-toughness deformation state rare earth heat-resistant magnesium alloy material after multiple times of cyclic upsetting-extruding. (4) solid solution and aging treatment, specifically, enabling heat treatment to adopt solid solution and aging treatment and heat preservation, adopting hot water quenching after discharging, and after cooling to room temperature, conducting aging and preserving heat. The magnesium alloy prepared by the solution is good in quality, and has more obvious high tensile strength and high elongation compared with common magnesium alloys in the market.