Mike Rumbles, who was MSP for West Aberdeenshire and Kincardine, used the publicly funded Edinburgh accommodation allowance (EAA), which helps MSPs to buy property in Edinburgh, to race up the property ladder, purchasing three flats in eight years.
Mr Rumbles sold two properties and reinvested in larger ones with help from the public fund, eventually making a 40,000 profit. He now owns a 300,000 flat in an exclusive district of the capital, and claimed about 10,000 a year to help pay off his mortgage.
The revelation follows a call from the Corporate Body - a group of MSPs that oversees the running of the parliament - to review the controversial EAA.
Critics say the system, which allows MSPs to buy flats in the capital and claim for mortgage interest, leads to politicians making big profits from rising property prices while taxpayers pay the bills.
Yesterday, Mr Rumbles defended his use of the allowance.
He said: "I have bought three flats in Edinburgh. I made a loss on the sale of the first flat. And on the sale of the second flat I paid a capital-gains tax of 40 per cent.
"The allowance is essential for MSPs from outside of the capital. We only get half the allowance the Westminster MPs receive. The Scottish Parliament is extremely fair in this regard."
The EAA has put several high-profile politicians under the spotlight. Nicol Stephen, the Deputy First Minister, broke Holyrood expenses rules by claiming thousands of pounds on a house jointly owned with his wife.
John Home Robertson, who was Labour MSP for East Lothian, was criticised after it was revealed he was claiming 7,000 a year to live in his son's Edinburgh flat.
Last week, George Reid, the former Presiding Officer, called for a review of the EAA. It could be carried out by the senior salaries review body or senior figures from industry.
Yesterday, a Scottish Parliament spokesman said: "The Corporate Body has set out the options in a 'legacy paper' for its successors for how a review of allowances could be taken forward. It will be for the next Corporate Body to decide, after it is elected in May 2007."
Mr Rumbles, who used to convene Holyrood's standards committee, first bought property in the capital in 1999, a 78,000 flat in Restalrig Drive. He sold it three years later and bought a property in Ocean Drive, for 132,000.
The MSP then made a 37,000 profit through the sale of this flat in 2005, after which he bought a 300,000 flat. Similar properties in the area have two double bedrooms, a private terrace and parking facilities.
Solidarity leader Tommy Sheridan, who has long called for the allowance to be scrapped, said: "This must be the final nail in the coffin of the Edinburgh accommodation allowance. We knew MSPs were making profits from the scheme, but to see them making profits on two or three flats is obscene. Potentially, someone could take more than 100,000 in public money over three terms as an MSP and make capital gains of over 300,000.
"I will introduce a motion calling for an independent review and for those MSPs who have made substantial profits due to taxpayers' subsidy to repay it to the parliament. The new parliament must start with a clean sheet and we must end this lucrative scam."