GDE2 (GDPD5) is a multispanning membrane phosphodiesterase with phospholipase D-like activity that cleaves select glycosylphosphatidylinositol (GPI)-anchored proteins and thereby promotes neuronal differentiation both in vitro and in vivo. GDE2 is a prognostic marker in neuroblastoma, while loss of GDE2 leads to progressive neurodegeneration in mice; however, its regulation remains unclear. Here we report that in immature neuronal cells, GDE2 undergoes constitutive endocytosis and travels back along both fast and slow recycling routes. GDE2 trafficking is directed by C-terminal tail sequences that determine GDE2's ability to cleave GPI-anchored glypican-6 (GPC6) and induce a neuronal differentiation program. Specifically, we define a GDE2 truncation mutant that shows aberrant recycling and is dysfunctional, whereas a consecutive deletion results in cell-surface retention and gain of GDE2 function, thus uncovering distinctive regulatory sequences. Moreover, we identify a C-terminal leucine residue in a unique motif that is essential for GDE2 internalization. These findings establish a mechanistic link between GDE2 neuronal function and sequence-dependent trafficking, a crucial process gone awry in neurodegenerative diseases.