The Spain international has fallen out of favour under Carlo Ancelotti and made just nine appearances in La Liga all season.
His contract is set to expire this summer and El Chiringuito claim he's already decided join Barcelona in principle.
Club president Joan Laporta is keen to bolster their squad with free agents due to their financial situation.
Last summer saw Lionel Messi depart due to an inflated wage bill and a number of players have been forced to take pay cuts.
Isco joined Madrid from Malaga in 2013 and has helped the club to two La Liga titles and four Champions Leagues with 346 appearances across the board.
He can operate on the wings but is at his best in central midfield, playing just behind the striker.
Javier Saviola was the last player to move between both clubs directly, joining Madrid from Barcelona in 2007.
Saviola spent just two years in Madrid before moving on to Benfica, compared to the six he spent with Barcelona.
Barcelona have made a number of moves in the January transfer market, signing Dani Alves on a free transfer and Ferran Torres from Manchester City for £55 million.
Torres wasn't able to be registered until Monday, when wantaway defender Samuel Umtiti agreed to a contract extension and pay cut.
Umtiti will see his wages reduced for the next 18 months should he stay at the Camp Nou.
The France international is still open to leaving the club should a decent offer come in.
Madrid and Barcelona are set to meet in the Spanish Super Cup in Saudi Arabia on Wednesday.
The winner will then face one of Atletico Madrid or Athletic Bilbao in the final on Sunday.
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