In a statement to journalists, the Integrity Commission said it had worked with Baghdad authorities to recover the land in Kadhimiyah district.
"The Baghdad-Karakh appeals court issued a decision to seize the property, which amounts to 12,642 square meters, from the wife of a leading official in the previous government and re-register it in the name of the Mayorality," the statement said.
"The land registration in the name of the official's wife has been nullified, as well as all subsequent registrations," it added.
The northern neighborhood of Kadhimiyah is home to a revered Shia shrine, as well as some of the city's most luxurious properties -- priced at up to $10,000 per square meter, Presstv reported.
The Integrity Commission said its investigation had revealed the official had sold the property to his wife in violation of laws regulating the lease or sale of state-owned property.
It did not reveal the official's identity, but a parliamentary source told AFP the accused had briefly served as a deputy to Iraq's former prime minister, Haider al-Abadi.
In Baghdad, abandoned homes once belonging to Saddam Hussein-era officials or to minorities who have fled abroad are regularly occupied by powerful political parties.
Iraq, according to Transparency International, is the 12th most corrupt country in the world.
The embezzlement of public goods -- from land to government funds -- is a deeply rooted problem in a country with such a large public sector.
Corruption, shell companies and "phantom" public employees who receive salaries but do not work have cost Iraq the equivalent of $228 billion dollars since 2003, according to Iraq's parliament.
That figure is more than the country's gross domestic product and nearly three times the annual budget.