MSPs from far-flung areas of the country should continue to be able to claim for renting flats or staying in hotels in Edinburgh – but not for paying mortgage interest.
The recommendation came in the report of an independent review body set up to scrutinise MSPs' allowances.
Several MSPs have bought houses using the scheme under current rules.
But Sir Alan Langlands, who led the review, said: "What's wrong with it is that I don't think it's a proper use of public money."
His report, which has been submitted to Holyrood officials, recommends an overhaul of allowances and the way MSPs' staff are paid.
MSPs should not be allowed to lease accommodation from close relatives, and they should be required to register if they are employing a close family member. Meanwhile, parliamentarians' car mileage rates should be cut from 49.3p a mile to 40p.
However, recommendations to put MSPs' staff onto new pay scales could cost an extra 1.25 million a year.
The review panel headed by Sir Alan, principal and vice-chancellor of Dundee University and former chief executive of the NHS in England, was set up last June to carry out a full-scale review of Holyrood's parliamentary allowances.
The Edinburgh accommodation allowance, worth up to 11,400 a year, is by far the most controversial of the allowances available and has led to accusations that MSPs are making big profits with taxpayers' help in Edinburgh's booming property market, even though they were acting within the rules.
Mike Rumbles, the MSP for West Aberdeenshire and Kincardine, used the publicly funded Edinburgh accommodation allowance – which helps MSPs to buy property in Edinburgh – to race up the property ladder, purchasing three flats in eight years.
Meanwhile, Tavish Scott, the former transport minister and MSP for Shetland, was claiming 979 a month from the taxpayer to cover the costs of a mortgage and other bills on a house in the city's Morningside area.
Sir Alan's report recommends scrapping the allowance's mortgage interest provisions at the end of the current parliament in 2011.
The panel's report states: "Criticism of the existing arrangements has been widespread and persistent.
In the circumstances, we believe that the status quo is not an option in any new scheme, especially if the new scheme is to command the confidence of the public."
Alternatives such as parliament officials clawing back some of the profits on the sale of a property, or buying homes and leasing them out to MSPs, are considered in the report, but rejected on practical grounds.
Recommending that the mortgage interest concession be scrapped, the report said that it failed the test that MSPs should not be seen to benefit from a scheme that enabled them to make a "substantial" profit.
However, it acknowledges "short-term difficulties" could be caused to MSPs currently claiming the allowance by its immediate abolition, and recommends a transition period lasting for the remaining life of this parliament.
Last night, Alex Fergusson, the Scottish Parliament's Presiding Officer, said: "We agree with the panel that greater public confidence in a new scheme is essential."
MP RECEIPT LIMIT IS CUT
MPs will have to submit receipts for expenses claims over 25 – instead of the current limit of 250 – the Commons members estimate committee announced yesterday.
The committee also said the amount of petty cash MPs can draw for office expenses would be reduced from 250 to 50 per month.
In a report published as part of its review of MPs' allowances, the committee, chaired by Michael Martin, the Speaker, said: "The members estimate committee has instructed the Department of Resources that, with effect from 1 April, 2008, no claim against allowances of 25 or more per item will be reimbursed unless accompanied by a receipt."