Police say 300 families took over the property owned by Juan Carlos Ramirez Abadia in Rio Grande do Sul state.
The ranch, said to be worth nearly $1m (£500,000), was confiscated when he was arrested last August.
The accused is in a high-security jail in Brazil awaiting extradition to the US on drug and racketeering charges.
He is regarded by the authorities as one of Colombia's leading drug-traffickers.
At the time of his arrest, the Brazilian authorities seized several homes belonging to him in various parts of the country which are said to be worth around $3.2m.
On Monday, demonstrators occupied one of those properties - a ranch of 129 hectares (319 acres) - just hours before it was to be auctioned for a second time.
There were no bids at the first auction, though the other properties were sold for more than $2m.
The protest has been organised by the Brazilian landless movement, the MST.
The MST says the land was bought with money raised through criminal activity and it wants the government to use the area to settle local families.
It says it intends to remain on the property until it gets a response from the authorities.
But officials say the auction will go ahead and that a judge who ordered the sale of the properties will ensure the protesters are removed.
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