Gianluigi Torzi is accused of extortion, embezzlement, aggravated fraud and money laundering in relation to the $200m (£160m) deal.
He is being held in Vatican police barracks, and faces up to 12 years in prison if found guilty.
The 2018 purchase of the building is subject to an ongoing investigation.
The apartment block on Sloane Avenue, in London’s exclusive Chelsea, had been bought with church money by the Secretariat of State, the body charged with the Vatican’s diplomatic and political functions.
But it is alleged the price was greatly inflated.
In October, police raided the Secretariat’s office and seized documents and computers, and the Vatican suspended five officials, barring them from the city state.