"Mario Land," including the castle on it, were given to Mario as a way of saying thank you, from Toadstool and/or Daisy. After he got it back from Wario, however, he realized he didn't need a whole island to rule or a big castle to live in to be happy, which is why in future games we see him living in a small house; given his blue-collar roots, he likely finds it much more comfortable.
Mario Land is a theme parkThink about it: six main areas surrounding a castle in the center. Seem familiar?
- Might even be the same "Mario Land" we see in the intro to Mario Party 2. Incidentally, Wario tried to seize control of that one as well.
- It would explain why Mario has a "castle" in this one, but lives in a small house with his brother in all other games. It was never "his castle" to begin with, it's just the central attraction of the Mario Land Theme Park.