Officials entered Colonia Dignidad in to take over its assets as part of an investigation into its former leaders.
Former Nazi Paul Schaefer, 83, is accused of aiding secret police under Chile's 1973-1990 military rule and sexually abusing 26 children.
Mr Schaefer was arrested in March after eight years on the run.
Three of his aides are also facing charges as his accomplices.
Earlier this year, two arms caches were found at the colony's farm.
Colonia Dignidad's leaders were also suspected of keeping its 300 residents against their will.
Control of the community was handed over to a state appointed lawyer.
Clara Szczaranski, a Chilean prosecutor, said the intervention "frees the colony residents, the workers, the simple people living there from the oppressive system they have been subject to.
"Now, they can live as normal citizens," she said.
The farming and religious colony, which Mr Schaefer - a former corporal in the German army - founded in 1961, was cut off from the outside world.
It is believed to have served as an interrogation and torture centre for political prisoners during Gen Augusto Pinochet's military regime.