New Zealand international and the club's inaugural signing Cam Howieson was the hero at a sold-out Go Media Stadium, firing the match-winner in the 60th minute.
Auckland became the first New Zealand team to win an ALM grand final, doing so in front of a raucous 28,374-strong crowd on home soil on Saturday.
The league's youngest club, coach Steve Corica has guided Auckland to a championship in their second season after winning a premiership in their debut campaign.
Cementing his status in the league history books, former Sydney FC captain and manager Corica claims his third championship title after leading the Sky Blues to back-to-back titles in 2019 and 2020.
He is the first coach in the ALM era to win three grand finals, with Ange Postecoglou winning two National Soccer League championships and two in the modern league.
Auckland are the third club in league history to win a grand final from outside the top two, having finished the regular season in third.
Western United had completed the feat in 2022 from third, while Melbourne Victory won the 2018 title from fourth.
Claiming the Joe Marston Medal for his man-of-the-match performance, local boy Howieson scored his first ALM goal when Auckland needed it most.
Sydney defender Jordan Courtney-Perkins had tried to clear the ball in the box with a header, but his clearance went straight to Howieson.
Desperate to mop up his mistake, Courtney-Perkins' outstretched foot only helped Howieson's shot past goalkeeper Harrison Devenish-Meares.
Sydney coach Patrick Kisnorbo turned to substitute Joe Lolley in 64th minute, but the fit-again striker couldn't conjure any magic.
The Sky Blues fall short of a record-extending sixth championship title, having now lost their last two grand final appearances.
Kisnorbo had been at the helm of Sydney's last decider loss, guiding Melbourne City to a 3-1 win in 2021.
The first side to reach a grand final from fifth, the Sky Blues have yet to beat Auckland across competitions dating back to 2024.
The grand final defeat was Sydney's first loss under Kisnorbo, who joined the club in March as Ufuk Talay's replacement.
AAP travelled to Auckland as a guest of Australian Professional Leagues.
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