Since it was decommissioned in 2007, there has been speculation about whether the building, which held about 59 medium-security prisoners and 40 remand prisoners, would be reopened for remand prisoners or sold.
The category one historic building is worth about $1.8 million, according to Dunedin City Council rating information.
Corrections assistant general manager Derek Lyons said, when contacted, upgrading and maintaining the prison to allow it continue operating would have meant a significant investment.
[comment caption=What would be a good use for the old prison?]He declined to comment further on the sale, citing commercial sensitivity.
A spokeswoman for Ngai Tahu, which has first right of refusal on the building, said it was too early in the process to comment.
Mr Lyons said the prison, built in 1896 and one of the oldest in New Zealand, did not meet the department's security standards.
The Otago Corrections Facility at Milburn was built because the facilities were inadequate.
The prison's exterior was protected by its Historic Places Trust category one rating, but the interior could be modified.
Southern Heritage Trust founding member Ann Barsby in 2002 completed a proposal on the building's future and has made several submissions since to the city council.
In a submission to the council's 2007 annual-plan hearings, she said Dunedin needed a major new heritage tourism attraction.
The prison had considerable historical significance and was situated in Dunedin's prime heritage precinct.
She said last week the prison had multiple possible uses, such as a backpackers, boutique hotel, an exhibition space telling the stories of early Dunedin, or as a repository for New Zealand's penal and legal history.
It could be used for "fright nights", or as a bar.
The building should be preserved as a community asset and developed as a multipurpose tourism complex, she said.
Historic Places Trust Otago and Southland area manager Owen Graham said the trust was aware Corrections was preparing a report on the prison's future.
His understanding was the building was on a former prison site, making it more significant.
Decommissioned prisons around the world were being used for a variety of purposes and there were many possibilities.
The trust was keen to be involved with, and advise, any developer wanting to buy the site and would seek to work alongside them in the early planning stage.
Cr John Bezett said the council was the logical body to take on the prison if it was not sold.
The council would only want to pay a "nominal" amount for the building, considering the huge costs of refurbishing, Cr Bezett, the council representative for the Otago Settlers Museum and South Dunedin's Gasworks Museum, said.
