Jackson had been linked to a return to his home state all season and told the Demons of his desire to head west at his exit meeting on Tuesday.
The 20-year-old has been predominantly linked to Fremantle but did not nominate a club, meaning the Demons can also deal with West Coast, who currently have pick No.2 in this year's draft.
"There is no doubt that we wanted Luke to remain at the Demons, but we respect his decision to want to return home to Western Australia to be closer to his family and friends," Melbourne list boss Tim Lamb said in a statement.
"We will now work to secure a deal that compensates the club accordingly."
The Demons are expected to target Collingwood's two-time All-Australian Brodie Grundy as Jackson's replacement.
Jackson, pick No.3 in the 2019 draft, has played 52 games since his debut in 2020.
He teamed up with skipper Max Gawn in last year's breakthrough premiership, including turning the grand final on its head with a remarkable third-quarter burst in the ruck.
Jackson's fine second season in 2021 also delivered the AFL Rising Star award, though he has struggled to reach similar heights this year, when Melbourne exited the finals in straight sets.
Having both WA clubs in play allows Melbourne to secure the best possible deal for Jackson.
West Coast would have to seek AFL permission, which they would be expected to receive, to trade their top pick for Jackson as they have traded multiple first-round selections in recent years.
Fremantle's pick No.13 would likely play a role in any deal for Jackson, who would form an attractive combination with man mountain Sean Darcy.
The Dockers are expected to part ways with forward/ruck Rory Lobb and versatile tall Griffin Logue in this trade period.
Melbourne, who don't have a first-round pick this year, would likely also need to secure draft currency to prise Grundy from Collingwood.
Grundy is contracted to the Magpies until the end of 2027 after signing a monster seven-year deal in January 2020 but met with Melbourne earlier this year.
The 28-year-old hasn't played since round six after suffering a knee injury and then an ankle stress fracture.
Darcy Cameron's successful partnership with Mason Cox in the meantime has opened the door for Collingwood, who need to free up salary cap space, to consider life without Grundy.
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