The sale of the yacht to casino firm Genting Malaysia marks the country’s largest recovery yet of 1MDB cash.
Billions of dollars were allegedly embezzled from 1MDB, which was set up in 2009 to aid economic development.
It comes as Malaysia’s ex-PM Najib Razak faces his first trial over his role in the sweeping financial scandal.
He denies any wrongdoing.
US authorities say money siphoned from 1MDB was used to buy lavish assets including a private jet, paintings, real estate -and the luxury yacht, Equanimity.
Businessman Low Taek Jho, a key figure in the scandal, allegedly purchased the superyacht which was confiscated by authorities in 2018.
On Wednesday, a court approved its sale to Genting Malaysia for $126m.
Equanimity – decked out with a 20m swimming pool, spa and sauna, movie theatre and helipad – has been moored off the coast of Malaysia for the past five months, on show for potential buyers.
The Malaysian government said the pool of buyers was small, and while many offers were received, only a few topped $100m.
The price also fell well short of the $250m reportedly paid by Mr Low.
The Chinese-Malaysian financier has been portrayed by Malaysian and US investigators as one of the masterminds of the 1MDB scam.
US prosecutors say Mr Low leveraged his powerful political connections to win business for 1MDB through the payment of hundreds of millions of dollars in bribes.