diff --git a/setup.c b/setup.c
index 145eca50f4..6f8f769584 100644
--- a/setup.c
+++ b/setup.c
@@ -240,6 +240,7 @@ const char *setup_git_directory_gently(int *nongit_ok)
 			if (chdir(work_tree_env) < 0)
 				die ("Could not chdir to %s", work_tree_env);
 			strcat(buffer, "/");
+			inside_work_tree = 1;
 			return retval;
 		}
 		if (nongit_ok) {