Herein, we introduce a facile, user- and environmentally friendly (n-octanol-induced) oleic acid (OA)/ionic liquid (IL) two-phase system for the phase- and size-controllable synthesis of water-soluble hexagonal rare earth (RE=La, Gd, and Y) fluoride nanocrystals with uniform morphologies (mainly spheres and elongated particles) and small sizes (<50 nm). The unique role of the IL 1-butyl-3-methylimidazolium hexafluorophosphate (BmimPF6) and n-octanol in modulating the phase structure and particle size are discussed in detail. More importantly, the mechanism of the (n-octanol-induced) OA/IL two-phase system, the formation of the RE fluoride nanocrystals, and the distinctive size- and morphology-controlling capacity of the system are presented. BmimPF6 is versatile in term of crystal-phase manipulation, size and shape maintenance, and providing water solubility in a one-step reaction. The luminescent properties of Er3+-, Ho3+-, and Tm3+-doped LaF3, NaGdF4, and NaYF4 nanocrystals were also studied. It is worth noting that the as-prepared products can be directly dispersed in water due to the hydrophilic property of Bmim+ (cationic part of the IL) as a capping agent. This advantageous feature has made the IL-capped products favorable in facile surface modifications, such as the classic Stober method. Finally, the cytotoxicity evaluation of NaYF4:Yb,Er nanocrystals before and after silica coating was conducted for further biological applications.