diff --git a/v2/build/property-set.jam b/v2/build/property-set.jam
index e4016230c..0cabe011b 100644
--- a/v2/build/property-set.jam
+++ b/v2/build/property-set.jam
@@ -231,6 +231,12 @@ class property-set
         return $(self.as-path) ;
     }        
     
+    # Computes the target path that should be used for 
+    # target with these properties.
+    # Returns a list of
+    #   - the computed path
+    #   - if the path is relative to build directory, a value of
+    #     'true'. 
     rule target-path ( )
     {
         if ! $(self.target-path)
@@ -253,12 +259,14 @@ class property-set
                 local prefix = [ get <location-prefix> ] ;            
                 if $(prefix)
                 {
-                    self.target-path = "." [ path.join $(prefix) $(p) ] ;
+                    self.target-path = [ path.join $(prefix) $(p) ] ;
                 }   
                 else
                 {
-                    self.target-path = "." $(p) ;
+                    self.target-path = $(p) ;
                 }                
+                # The path is relative to build dir.
+                self.target-path += true ;
             }            
         } 
         return $(self.target-path) ;
diff --git a/v2/build/virtual-target.jam b/v2/build/virtual-target.jam
index bd2589730..d4fd49d20 100644
--- a/v2/build/virtual-target.jam
+++ b/v2/build/virtual-target.jam
@@ -500,15 +500,14 @@ class file-target : abstract-file-target
                 local p = [ $(self.action).properties ] ;                
                 local path = [ $(p).target-path ] ;
                 
-                if $(path[1]) = "."
+                if $(path[2]) = true
                 {        
                     # Indicates that the path is relative to
                     # build dir.
-                    path = [ path.root $(path[2]) 
-                      [ $(self.project).build-dir ] ] ;
+                    path = [ path.join [ $(self.project).build-dir ]
+                       $(path[1]) ] ;
                 }
-                
-                
+                                
                 # Store the computed path, so that it's not recomputed
                 # any more
                 self.path = [ path.native $(path) ] ;
diff --git a/v2/test/stage.py b/v2/test/stage.py
index 69e442a34..8f14fd00d 100644
--- a/v2/test/stage.py
+++ b/v2/test/stage.py
@@ -166,6 +166,15 @@ t.write("a2.txt", "")
 t.run_build_system("a2")
 t.expect_addition(["dist/a1.txt", "dist/a2.txt"])
 
+# Regression test: check if <location>. works
+t.rm(".")
+t.write("Jamroot", """
+stage a1 : d/a1.txt : <location>. ;
+""")
+t.write("d/a1.txt", "")
+t.run_build_system()
+t.expect_addition("a1.txt")
+
 
 
 t.cleanup()