The ownership of Kooroowall-Undi (Peat Island) will be transferred to the Aboriginal community as confirmed by the New South Wales government on Thursday.

Kooroowall-Undi and a portion of the mainland foreshore at Mooney Mooney on NSW's Hawkesbury River will be transferred to the Darkinjung Local Aboriginal Land Council.

The NSW government and DLALC first announced their intent to negotiate a transfer of ownership in January of this year.

DLALC submitted a land claim in the hopes of using the land to further economic and cultural opportunities for the local Aboriginal community.

DLALC executive officer Brendan Moyle said the transfer is a significantly emotional moment for the Darkinjung people.

"Too often, tourists from around Australian and the world bypass Sydney to learn more about ancient Aboriginal dreaming stories and practices in places like the Northern Territory and elsewhere in Northern Australia," Moyle said.

"This transfer will allow us to work with the NSW Government to create an internationally renowned place where the ancient cultures and creation stories can be celebrated right here on Sydney's doorstep."

NSW Aboriginal Affairs Minister Ben Franklin said this agreement could allow for the cultural preservation of Kooroowall-Undi.

"This agreement paves the way for the local Aboriginal communities to prepare planning proposals for their land to become a rich embodiment of local Aboriginal culture, identity and heritage," he said.

The island was formerly home to an asylum from 1911 to 2010.

Since the asylum was disbanded various NSW state government attempted to put in plans to instate a marina or cafes on the island.

DLALC hopes the transfer of ownership will help Australians living in the Mooney Mooney area and those visiting to embrace local ancient culture, lore and practices.