Nicotine dependence is linked to single nucleotide polymorphisms in the CHRNB4-CHRNA3-CHRNA5 gene cluster encoding the α3β4α5 nicotinic acetylcholine receptor (nAChR). Here we show that the β4 subunit is rate limiting for receptor activity, and that current increase by β4 is maximally competed by one of the most frequent variants associated with tobacco usage (D398N in α5). We identify a β4-specific residue (S435), mapping to the intracellular vestibule of the α3β4α5 receptor in close proximity to α5 D398N, that is essential for its ability to increase currents. Transgenic mice with targeted overexpression of Chrnb4 to endogenous sites display a strong aversion to nicotine that can be reversed by viral-mediated expression of the α5 D398N variant in the medial habenula (MHb). Thus, this study both provides insights into α3β4α5 receptor-mediated mechanisms contributing to nicotine consumption, and identifies the MHb as a critical element in the circuitry controlling nicotine-dependent phenotypes.