The Alcázar de Colón was built when Santo Domingo served as the administrative center of Spain's rapidly expanding Caribbean empire. Diego Colón, eldest son of Christopher Columbus, arrived on Hispaniola in 1509 as governor of the Indies. King Ferdinand granted him a prominent site overlooking the Ozama River, near the port and the new city's principal institutions. Constructed largely between 1511 and 1514 from coral limestone, the fortified residence combined late Gothic forms with Renaissance details. It was both a family home and a governor's palace, intended to proclaim the Columbus family's inherited status and authority.

Diego lived there with his wife, María de Toledo, a niece of the Duke of Alba with close connections to the Spanish court. Their household became a focus of elite political and social life in the first permanent European city in the Americas. Governors, royal officials, clergy, merchants, and military leaders passed through Santo Domingo while expeditions pushed toward Cuba, Mexico, Central America, and South America. Decisions made within this colonial governing environment helped organize conquest, settlement, taxation, and forced labor. The palace's comforts and imported furnishings depended upon the same imperial system that dispossessed Indigenous peoples and expanded African slavery on Hispaniola.

The residence also stood at the center of the long legal struggle over privileges promised to Christopher Columbus. Diego repeatedly contested the Crown's efforts to limit the family's powers. He returned to Spain and died there in 1526, but María de Toledo continued to occupy the palace and defend the family's claims until her death in 1549. Several of their children were born in the building, and three generations of the Colón de Toledo family used it. During these decades the house witnessed Santo Domingo's transition from the launching point of conquest to one colonial capital among many as wealth and political attention shifted to the mainland.

By the later sixteenth century the family's presence diminished. The English assault on Santo Domingo led by Francis Drake in 1586 damaged and disrupted the colonial city, and the Alcázar entered a long decline. By the eighteenth century it was abandoned and partly ruined; only twenty-two of its approximately fifty-five rooms survived. Proposals to reuse it, including a plan for a prison, came to nothing. Its empty shell nevertheless remained a powerful reminder of the earliest period of Spanish rule.

The Dominican government declared the building a national monument in 1870. A major restoration between 1955 and 1957 reconstructed roofs and interiors and converted it into a museum. Period furniture, tapestries, armor, and works of late medieval and Renaissance art were installed to evoke the household of a sixteenth-century viceregal court. Today the Alcázar is significant not only as the oldest surviving fortified European palace in the Americas, but as a place where family ambition, royal administration, conquest, slavery, and the making of colonial Santo Domingo converged. Its history reveals both the ceremonial splendor and the profound human consequences of Spain's first American empire. The museum's restoration reflects twentieth-century ideas about how the colonial past should be presented, and not every displayed object originally belonged to the household. Even so, the surviving plan and riverfront position make the Alcázar an unusually direct witness to the first generation of Spanish imperial government in the Caribbean.