The plasma membranes of epithelial cells plasma membranes contain distinct apical and basolateral domains that are critical for their polarized functions. However, both domains are continuously internalized, with proteins and lipids from each intermixing in supranuclear recycling endosomes (REs). To maintain polarity, REs must faithfully recycle membrane proteins back to the correct plasma membrane domains. We examined sorting within REs and found that apical and basolateral proteins were laterally segregated into subdomains of individual REs. Subdomains were absent in unpolarized cells and developed along with polarization. Subdomains were formed by an active sorting process within REs, which precedes the formation of AP-1B-dependent basolateral transport vesicles. Both the formation of subdomains and the fidelity of basolateral trafficking were dependent on PI3 kinase activity. This suggests that subdomain and transport vesicle formation occur as separate sorting steps and that both processes may contribute to sorting fidelity.