The Spaniard, who joined Los Blancos from Malaga in 2013, has made two La Liga starts so far this season and netted his first goal of the campaign off the bench in their recent 6-1 win over Mallorca.
Reports suggested that the 29-year-old was allowed to leave the Santiago Bernabeu over the summer, but he was said not to have been convinced by any of the offers, and remained at the club following the appointment of Carlo Ancelotti.
According to todofichajes, AC Milan are now keen to bring the former Malaga midfielder to the San Siro and have held advanced talks with the Madrid giants about a potential deal.
While the Spain international sees his Bernabeu contract expire in the summer, the Rossoneri could swoop to secure his signature in January, with Los Blancos set to accept a cut-price offer.
Such a move would see Isco's Real Madrid career brought to an end after making over 340 appearances, registering 52 goals and 56 assists while winning two La Liga titles and four Champions League medals.