Princess Peach's castle is a castle, presumably one belonging to Princess Peach. Princess Peach has chambers inside this castle, and there is also a throne room. Next to the gates of the castle, there is a city. There is also a patch of ground near the walls that needs to be raked.
In the Prologue, Mario is kicked out of Peach's castle and is replaced by Waluijew. Waluijew punches him through the walls, which creates a massive hole in them. One of these holes leads to the throne room.