Of the five muscarinic receptor subtypes, the M5 receptor is the only one detectable in midbrain dopaminergic neurons, making it an attractive potential therapeutic target for treating disorders in which dopaminergic signaling is disrupted. However, developing an understanding of the role of M5 in regulating midbrain dopamine neuron function has been hampered by a lack of subtype-selective compounds. Here, we extensively characterize the novel compound VU0238429 and demonstrate that it acts as a positive allosteric modulator with unprecedented selectivity for the M5 receptor. We then used VU0238429, along with M5 knock-out mice, to elucidate the role of this receptor in regulating substantia nigra pars compacta (SNc) neuron physiology in both mice and rats. In sagittal brain slices that isolate the SNc soma from their striatal terminals, activation of muscarinic receptors induced Ca2+ mobilization and inward currents in SNc dopamine neurons, both of which were potentiated by VU0238429 and absent in M5 knock-out mice. Activation of M5 also increased the spontaneous firing rate of SNc neurons, suggesting that activation of somatodendritic M5 increases the intrinsic excitability of SNc neurons. However, in coronal slices of the striatum, potentiation of M5 with VU0238429 resulted in an inhibition in dopamine release as monitored with fast scan cyclic voltammetry. Accordingly, activation of M5 can lead to opposing physiological outcomes depending on the location of the receptor. Although activation of somatodendritic M5 receptors on SNc neurons leads to increased neuronal firing, activation of M5 receptors in the striatum induces an inhibition in dopamine release.