diff --git a/src/lightning_app/components/python/tracer.py b/src/lightning_app/components/python/tracer.py
index 0dc8c70f9a5f4..c476f083258fc 100644
--- a/src/lightning_app/components/python/tracer.py
+++ b/src/lightning_app/components/python/tracer.py
@@ -117,11 +117,18 @@ def __init__(
         self.code_name = code.get("name") if code else None
         self.restart_count = 0
 
-    def run(self, params: Optional[Dict[str, Any]] = None, restart_count: Optional[int] = None, **kwargs):
+    def run(
+        self,
+        params: Optional[Dict[str, Any]] = None,
+        restart_count: Optional[int] = None,
+        code_dir: Optional[str] = ".",
+        **kwargs,
+    ):
         """
         Arguments:
             params: A dictionary of arguments to be be added to script_args.
             restart_count: Passes an incrementing counter to enable the re-execution of LightningWorks.
+            code_dir: A path string determining where the source is extracted, default is current directory.
         """
         if restart_count:
             self.restart_count = restart_count
@@ -137,7 +144,10 @@ def run(self, params: Optional[Dict[str, Any]] = None, restart_count: Optional[i
 
             if self.code_name in self.drive.list():
                 self.drive.get(self.code_name)
-                extract_tarfile(self.code_name, ".", "r:gz")
+                extract_tarfile(self.code_name, code_dir, "r:gz")
+
+        prev_cwd = os.getcwd()
+        os.chdir(code_dir)
 
         if not os.path.exists(self.script_path):
             raise FileNotFoundError(f"The provided `script_path` {self.script_path}` wasn't found.")
@@ -152,6 +162,7 @@ def run(self, params: Optional[Dict[str, Any]] = None, restart_count: Optional[i
         if self.env:
             os.environ.update(self.env)
         res = self._run_tracer(init_globals)
+        os.chdir(prev_cwd)
         os.environ = env_copy
         return self.on_after_run(res)
 
diff --git a/tests/tests_app/components/python/test_python.py b/tests/tests_app/components/python/test_python.py
index 57a5b422b9919..e32e63ccf5985 100644
--- a/tests/tests_app/components/python/test_python.py
+++ b/tests/tests_app/components/python/test_python.py
@@ -122,3 +122,28 @@ def test_tracer_component_with_code():
     assert python_script.script_args == ["--b=1", "--a=1"]
     os.remove("file.py")
     os.remove("sample.tar.gz")
+
+
+def test_tracer_component_with_code_in_dir(tmp_path):
+    """This test ensures the Tracer Component gets the latest code from the code object that is provided and
+    arguments are cleaned."""
+
+    drive = Drive("lit://code")
+    drive.component_name = "something"
+    code = Code(drive=drive, name="sample.tar.gz")
+
+    with open("file.py", "w") as f:
+        f.write('raise Exception("An error")')
+
+    with tarfile.open("sample.tar.gz", "w:gz") as tar:
+        tar.add("file.py")
+
+    drive.put("sample.tar.gz")
+    os.remove("file.py")
+    os.remove("sample.tar.gz")
+
+    python_script = TracerPythonScript("file.py", script_args=["--b=1"], raise_exception=False, code=code)
+    run_work_isolated(python_script, params={"--a": "1"}, restart_count=0, code_dir=str(tmp_path))
+    assert "An error" in python_script.status.message
+
+    assert os.path.exists(os.path.join(str(tmp_path), "file.py"))