diff --git a/builtin-init-db.c b/builtin-init-db.c
index 66ddaebcc5..0d9b1e0559 100644
--- a/builtin-init-db.c
+++ b/builtin-init-db.c
@@ -174,36 +174,7 @@ static void copy_templates(const char *git_dir, int len, const char *template_di
 	closedir(dir);
 }
 
-/*
- * Get the full path to the working tree specified in $GIT_WORK_TREE
- * or NULL if no working tree is specified.
- */
-static const char *get_work_tree(void)
-{
-	const char *git_work_tree;
-	char cwd[PATH_MAX];
-	static char worktree[PATH_MAX];
-
-	git_work_tree = getenv(GIT_WORK_TREE_ENVIRONMENT);
-	if (!git_work_tree)
-		return NULL;
-	if (!getcwd(cwd, sizeof(cwd)))
-		die("Unable to read current working directory");
-	if (chdir(git_work_tree))
-		die("Cannot change directory to specified working tree '%s'",
-			git_work_tree);
-	if (git_work_tree[0] != '/') {
-		if (!getcwd(worktree, sizeof(worktree)))
-			die("Unable to read current working directory");
-		git_work_tree = worktree;
-	}
-	if (chdir(cwd))
-		die("Cannot come back to cwd");
-	return git_work_tree;
-}
-
-static int create_default_files(const char *git_dir, const char *git_work_tree,
-	const char *template_path)
+static int create_default_files(const char *git_dir, const char *template_path)
 {
 	unsigned len = strlen(git_dir);
 	static char path[PATH_MAX];
@@ -282,16 +253,16 @@ static int create_default_files(const char *git_dir, const char *git_work_tree,
 	}
 	git_config_set("core.filemode", filemode ? "true" : "false");
 
-	if (is_bare_repository() && !git_work_tree) {
+	if (is_bare_repository())
 		git_config_set("core.bare", "true");
-	}
 	else {
+		const char *work_tree = get_git_work_tree();
 		git_config_set("core.bare", "false");
 		/* allow template config file to override the default */
 		if (log_all_ref_updates == -1)
 		    git_config_set("core.logallrefupdates", "true");
-		if (git_work_tree)
-			git_config_set("core.worktree", git_work_tree);
+		if (work_tree != git_work_tree_cfg)
+			git_config_set("core.worktree", work_tree);
 	}
 	return reinit;
 }
@@ -308,7 +279,6 @@ static const char init_db_usage[] =
 int cmd_init_db(int argc, const char **argv, const char *prefix)
 {
 	const char *git_dir;
-	const char *git_work_tree;
 	const char *sha1_dir;
 	const char *template_dir = NULL;
 	char *path;
@@ -329,7 +299,11 @@ int cmd_init_db(int argc, const char **argv, const char *prefix)
 			usage(init_db_usage);
 	}
 
-	git_work_tree = get_work_tree();
+	git_work_tree_cfg = xcalloc(PATH_MAX, 1);
+	if (!getcwd(git_work_tree_cfg, PATH_MAX))
+		die ("Cannot access current working directory.");
+	if (access(get_git_work_tree(), X_OK))
+		die ("Cannot access work tree '%s'", get_git_work_tree());
 
 	/*
 	 * Set up the default .git directory contents
@@ -346,7 +320,7 @@ int cmd_init_db(int argc, const char **argv, const char *prefix)
 	 */
 	check_repository_format();
 
-	reinit = create_default_files(git_dir, git_work_tree, template_dir);
+	reinit = create_default_files(git_dir, template_dir);
 
 	/*
 	 * And set up the object store.
diff --git a/builtin-ls-files.c b/builtin-ls-files.c
index 61577ea13f..d36181a755 100644
--- a/builtin-ls-files.c
+++ b/builtin-ls-files.c
@@ -469,9 +469,11 @@ int cmd_ls_files(int argc, const char **argv, const char *prefix)
 		break;
 	}
 
-	if (require_work_tree &&
-			(!is_inside_work_tree() || is_inside_git_dir()))
-		die("This operation must be run in a work tree");
+	if (require_work_tree && !is_inside_work_tree()) {
+		const char *work_tree = get_git_work_tree();
+		if (!work_tree || chdir(work_tree))
+			die("This operation must be run in a work tree");
+	}
 
 	pathspec = get_pathspec(prefix, argv + i);
 
diff --git a/builtin-rev-parse.c b/builtin-rev-parse.c
index 497903a85a..8d78b69c90 100644
--- a/builtin-rev-parse.c
+++ b/builtin-rev-parse.c
@@ -321,6 +321,13 @@ int cmd_rev_parse(int argc, const char **argv, const char *prefix)
 			}
 			if (!strcmp(arg, "--show-cdup")) {
 				const char *pfx = prefix;
+				if (!is_inside_work_tree()) {
+					const char *work_tree =
+						get_git_work_tree();
+					if (work_tree)
+						printf("%s\n", work_tree);
+					continue;
+				}
 				while (pfx) {
 					pfx = strchr(pfx, '/');
 					if (pfx) {
diff --git a/cache.h b/cache.h
index e1f94cbade..e97af18eea 100644
--- a/cache.h
+++ b/cache.h
@@ -208,6 +208,7 @@ enum object_type {
 extern int is_bare_repository_cfg;
 extern int is_bare_repository(void);
 extern int is_inside_git_dir(void);
+extern char *git_work_tree_cfg;
 extern int is_inside_work_tree(void);
 extern const char *get_git_dir(void);
 extern char *get_object_directory(void);
@@ -215,6 +216,7 @@ extern char *get_refs_directory(void);
 extern char *get_index_file(void);
 extern char *get_graft_file(void);
 extern int set_git_dir(const char *path);
+extern const char *get_git_work_tree(void);
 
 #define ALTERNATE_DB_ENVIRONMENT "GIT_ALTERNATE_OBJECT_DIRECTORIES"
 
diff --git a/environment.c b/environment.c
index a571fae607..2af12fd689 100644
--- a/environment.c
+++ b/environment.c
@@ -35,6 +35,10 @@ int pager_in_use;
 int pager_use_color = 1;
 int auto_crlf = 0;	/* 1: both ways, -1: only when adding git objects */
 
+/* This is set by setup_git_dir_gently() and/or git_default_config() */
+char *git_work_tree_cfg;
+static const char *work_tree;
+
 static const char *git_dir;
 static char *git_object_dir, *git_index_file, *git_refs_dir, *git_graft_file;
 
@@ -62,15 +66,8 @@ static void setup_git_env(void)
 
 int is_bare_repository(void)
 {
-	const char *dir, *s;
-	if (0 <= is_bare_repository_cfg)
-		return is_bare_repository_cfg;
-
-	dir = get_git_dir();
-	if (!strcmp(dir, DEFAULT_GIT_DIR_ENVIRONMENT))
-		return 0;
-	s = strrchr(dir, '/');
-	return !s || strcmp(s + 1, DEFAULT_GIT_DIR_ENVIRONMENT);
+	/* if core.bare is not 'false', let's see if there is a work tree */
+	return is_bare_repository_cfg && !get_git_work_tree();
 }
 
 const char *get_git_dir(void)
@@ -80,6 +77,26 @@ const char *get_git_dir(void)
 	return git_dir;
 }
 
+const char *get_git_work_tree(void)
+{
+	static int initialized = 0;
+	if (!initialized) {
+		work_tree = getenv(GIT_WORK_TREE_ENVIRONMENT);
+		/* core.bare = true overrides implicit and config work tree */
+		if (!work_tree && is_bare_repository_cfg < 1) {
+			work_tree = git_work_tree_cfg;
+			/* make_absolute_path also normalizes the path */
+			if (work_tree && !is_absolute_path(work_tree))
+				work_tree = xstrdup(make_absolute_path(git_path(work_tree)));
+		} else if (work_tree)
+			work_tree = xstrdup(make_absolute_path(work_tree));
+		initialized = 1;
+		if (work_tree)
+			is_bare_repository_cfg = 0;
+	}
+	return work_tree;
+}
+
 char *get_object_directory(void)
 {
 	if (!git_object_dir)
diff --git a/git-sh-setup.sh b/git-sh-setup.sh
index c51985e4c3..7bef43f39d 100755
--- a/git-sh-setup.sh
+++ b/git-sh-setup.sh
@@ -59,8 +59,7 @@ cd_to_toplevel () {
 }
 
 require_work_tree () {
-	test $(git rev-parse --is-inside-work-tree) = true &&
-	test $(git rev-parse --is-inside-git-dir) = false ||
+	test $(git rev-parse --is-inside-work-tree) = true ||
 	die "fatal: $0 cannot be used without a working tree."
 }
 
diff --git a/git.c b/git.c
index 7a788b9cfc..25b8274d3e 100644
--- a/git.c
+++ b/git.c
@@ -272,9 +272,14 @@ static int run_command(struct cmd_struct *p, int argc, const char **argv)
 		prefix = setup_git_directory();
 	if (p->option & USE_PAGER)
 		setup_pager();
-	if ((p->option & NEED_WORK_TREE) &&
-	    (!is_inside_work_tree() || is_inside_git_dir()))
-		die("%s must be run in a work tree", p->cmd);
+	if (p->option & NEED_WORK_TREE) {
+		const char *work_tree = get_git_work_tree();
+		const char *git_dir = get_git_dir();
+		if (!is_absolute_path(git_dir))
+			set_git_dir(make_absolute_path(git_dir));
+		if (!work_tree || chdir(work_tree))
+			die("%s must be run in a work tree", p->cmd);
+	}
 	trace_argv_printf(argv, argc, "trace: built-in: git");
 
 	status = p->fn(argc, argv, prefix);
diff --git a/setup.c b/setup.c
index b54d65fd07..3653092ab6 100644
--- a/setup.c
+++ b/setup.c
@@ -1,4 +1,8 @@
 #include "cache.h"
+#include "dir.h"
+
+static int inside_git_dir = -1;
+static int inside_work_tree = -1;
 
 const char *prefix_path(const char *prefix, int len, const char *path)
 {
@@ -170,100 +174,89 @@ static int is_git_directory(const char *suspect)
 	return 1;
 }
 
-static int inside_git_dir = -1;
-
 int is_inside_git_dir(void)
 {
-	if (inside_git_dir >= 0)
-		return inside_git_dir;
-	die("BUG: is_inside_git_dir called before setup_git_directory");
+	if (inside_git_dir < 0)
+		inside_git_dir = is_inside_dir(get_git_dir());
+	return inside_git_dir;
 }
 
-static int inside_work_tree = -1;
-
 int is_inside_work_tree(void)
 {
-	if (inside_git_dir >= 0)
-		return inside_work_tree;
-	die("BUG: is_inside_work_tree called before setup_git_directory");
+	if (inside_work_tree < 0)
+		inside_work_tree = is_inside_dir(get_git_work_tree());
+	return inside_work_tree;
 }
 
-static char *gitworktree_config;
-
-static int git_setup_config(const char *var, const char *value)
+/*
+ * If no worktree was given, and we are outside of a default work tree,
+ * now is the time to set it.
+ *
+ * In other words, if the user calls git with something like
+ *
+ *	git --git-dir=/some/where/else/.git bla
+ *
+ * default to /some/where/else as working directory; if the specified
+ * git-dir does not end in "/.git", the cwd is used as working directory.
+ */
+const char *set_work_tree(const char *dir)
 {
-	if (!strcmp(var, "core.worktree")) {
-		if (gitworktree_config)
-			strlcpy(gitworktree_config, value, PATH_MAX);
-		return 0;
+	char dir_buffer[PATH_MAX];
+	static char buffer[PATH_MAX + 1], *rel = NULL;
+	int len, postfix_len = strlen(DEFAULT_GIT_DIR_ENVIRONMENT) + 1;
+
+	/* strip the variable 'dir' of the postfix "/.git" if it has it */
+	len = strlen(dir);
+	if (len > postfix_len && !strcmp(dir + len - postfix_len,
+				"/" DEFAULT_GIT_DIR_ENVIRONMENT)) {
+			strncpy(dir_buffer, dir, len - postfix_len);
+
+		/* are we inside the default work tree? */
+		rel = get_relative_cwd(buffer, sizeof(buffer), dir_buffer);
 	}
-	return git_default_config(var, value);
+	/* if rel is set, the cwd is _not_ the current working tree */
+	if (rel && *rel) {
+		if (!is_absolute_path(dir))
+			set_git_dir(make_absolute_path(dir));
+		dir = dir_buffer;
+		chdir(dir);
+		strcat(rel, "/");
+		inside_git_dir = 0;
+	} else {
+		rel = NULL;
+		dir = getcwd(buffer, sizeof(buffer));
+	}
+	git_work_tree_cfg = xstrdup(dir);
+	inside_work_tree = 1;
+
+	return rel;
 }
 
+/*
+ * We cannot decide in this function whether we are in the work tree or
+ * not, since the config can only be read _after_ this function was called.
+ */
 const char *setup_git_directory_gently(int *nongit_ok)
 {
+	const char *work_tree_env = getenv(GIT_WORK_TREE_ENVIRONMENT);
 	static char cwd[PATH_MAX+1];
-	char worktree[PATH_MAX+1], gitdir[PATH_MAX+1];
-	const char *gitdirenv, *gitworktree;
-	int wt_rel_gitdir = 0;
+	const char *gitdirenv;
+	int len, offset;
 
+	/*
+	 * If GIT_DIR is set explicitly, we're not going
+	 * to do any discovery, but we still do repository
+	 * validation.
+	 */
 	gitdirenv = getenv(GIT_DIR_ENVIRONMENT);
-	if (!gitdirenv) {
-		int len, offset;
-
-		if (!getcwd(cwd, sizeof(cwd)-1))
-			die("Unable to read current working directory");
-
-		offset = len = strlen(cwd);
-		for (;;) {
-			if (is_git_directory(".git"))
-				break;
-			if (offset == 0) {
-				offset = -1;
-				break;
-			}
-			chdir("..");
-			while (cwd[--offset] != '/')
-				; /* do nothing */
-		}
-
-		if (offset >= 0) {
-			inside_work_tree = 1;
-			git_config(git_default_config);
-			if (offset == len) {
-				inside_git_dir = 0;
-				return NULL;
-			}
-
-			cwd[len++] = '/';
-			cwd[len] = '\0';
-			inside_git_dir = !prefixcmp(cwd + offset + 1, ".git/");
-			return cwd + offset + 1;
-		}
-
-		if (chdir(cwd))
-			die("Cannot come back to cwd");
-		if (!is_git_directory(".")) {
-			if (nongit_ok) {
-				*nongit_ok = 1;
-				return NULL;
-			}
-			die("Not a git repository");
-		}
-		setenv(GIT_DIR_ENVIRONMENT, cwd, 1);
-		gitdirenv = getenv(GIT_DIR_ENVIRONMENT);
-		if (!gitdirenv)
-			die("getenv after setenv failed");
-	}
-
-	if (PATH_MAX - 40 < strlen(gitdirenv)) {
-		if (nongit_ok) {
-			*nongit_ok = 1;
+	if (gitdirenv) {
+		if (PATH_MAX - 40 < strlen(gitdirenv))
+			die("'$%s' too big", GIT_DIR_ENVIRONMENT);
+		if (is_git_directory(gitdirenv)) {
+			if (!work_tree_env)
+				return set_work_tree(gitdirenv);
 			return NULL;
 		}
-		die("$%s too big", GIT_DIR_ENVIRONMENT);
-	}
-	if (!is_git_directory(gitdirenv)) {
 		if (nongit_ok) {
 			*nongit_ok = 1;
 			return NULL;
@@ -273,92 +266,53 @@ const char *setup_git_directory_gently(int *nongit_ok)
 
 	if (!getcwd(cwd, sizeof(cwd)-1))
 		die("Unable to read current working directory");
-	if (chdir(gitdirenv)) {
-		if (nongit_ok) {
-			*nongit_ok = 1;
-			return NULL;
-		}
-		die("Cannot change directory to $%s '%s'",
-			GIT_DIR_ENVIRONMENT, gitdirenv);
-	}
-	if (!getcwd(gitdir, sizeof(gitdir)-1))
-		die("Unable to read current working directory");
-	if (chdir(cwd))
-		die("Cannot come back to cwd");
 
 	/*
-	 * In case there is a work tree we may change the directory,
-	 * therefore make GIT_DIR an absolute path.
+	 * Test in the following order (relative to the cwd):
+	 * - .git/
+	 * - ./ (bare)
+	 * - ../.git/
+	 * - ../ (bare)
+	 * - ../../.git/
+	 *   etc.
 	 */
-	if (gitdirenv[0] != '/') {
-		setenv(GIT_DIR_ENVIRONMENT, gitdir, 1);
-		gitdirenv = getenv(GIT_DIR_ENVIRONMENT);
-		if (!gitdirenv)
-			die("getenv after setenv failed");
-		if (PATH_MAX - 40 < strlen(gitdirenv)) {
-			if (nongit_ok) {
-				*nongit_ok = 1;
-				return NULL;
-			}
-			die("$%s too big after expansion to absolute path",
-				GIT_DIR_ENVIRONMENT);
-		}
-	}
-
-	strcat(cwd, "/");
-	strcat(gitdir, "/");
-	inside_git_dir = !prefixcmp(cwd, gitdir);
-
-	gitworktree = getenv(GIT_WORK_TREE_ENVIRONMENT);
-	if (!gitworktree) {
-		gitworktree_config = worktree;
-		worktree[0] = '\0';
-	}
-	git_config(git_setup_config);
-	if (!gitworktree) {
-		gitworktree_config = NULL;
-		if (worktree[0])
-			gitworktree = worktree;
-		if (gitworktree && gitworktree[0] != '/')
-			wt_rel_gitdir = 1;
-	}
-
-	if (wt_rel_gitdir && chdir(gitdirenv))
-		die("Cannot change directory to $%s '%s'",
-			GIT_DIR_ENVIRONMENT, gitdirenv);
-	if (gitworktree && chdir(gitworktree)) {
-		if (nongit_ok) {
-			if (wt_rel_gitdir && chdir(cwd))
-				die("Cannot come back to cwd");
-			*nongit_ok = 1;
+	offset = len = strlen(cwd);
+	for (;;) {
+		if (is_git_directory(DEFAULT_GIT_DIR_ENVIRONMENT))
+			break;
+		if (is_git_directory(".")) {
+			inside_git_dir = 1;
+			if (!work_tree_env)
+				inside_work_tree = 0;
+			setenv(GIT_DIR_ENVIRONMENT, ".", 1);
 			return NULL;
 		}
-		if (wt_rel_gitdir)
-			die("Cannot change directory to working tree '%s'"
-				" from $%s", gitworktree, GIT_DIR_ENVIRONMENT);
-		else
-			die("Cannot change directory to working tree '%s'",
-				gitworktree);
-	}
-	if (!getcwd(worktree, sizeof(worktree)-1))
-		die("Unable to read current working directory");
-	strcat(worktree, "/");
-	inside_work_tree = !prefixcmp(cwd, worktree);
-
-	if (gitworktree && inside_work_tree && !prefixcmp(worktree, gitdir) &&
-	    strcmp(worktree, gitdir)) {
-		inside_git_dir = 0;
+		chdir("..");
+		do {
+			if (!offset) {
+				if (nongit_ok) {
+					if (chdir(cwd))
+						die("Cannot come back to cwd");
+					*nongit_ok = 1;
+					return NULL;
+				}
+				die("Not a git repository");
+			}
+		} while (cwd[--offset] != '/');
 	}
 
-	if (!inside_work_tree) {
-		if (chdir(cwd))
-			die("Cannot come back to cwd");
+	inside_git_dir = 0;
+	if (!work_tree_env)
+		inside_work_tree = 1;
+	git_work_tree_cfg = xstrndup(cwd, offset);
+	if (offset == len)
 		return NULL;
-	}
 
-	if (!strcmp(cwd, worktree))
-		return NULL;
-	return cwd+strlen(worktree);
+	/* Make "offset" point to past the '/', and add a '/' at the end */
+	offset++;
+	cwd[len++] = '/';
+	cwd[len] = 0;
+	return cwd + offset;
 }
 
 int git_config_perm(const char *var, const char *value)
@@ -386,6 +340,16 @@ int check_repository_format_version(const char *var, const char *value)
 		repository_format_version = git_config_int(var, value);
 	else if (strcmp(var, "core.sharedrepository") == 0)
 		shared_repository = git_config_perm(var, value);
+	else if (strcmp(var, "core.bare") == 0) {
+		is_bare_repository_cfg = git_config_bool(var, value);
+		if (is_bare_repository_cfg == 1)
+			inside_work_tree = -1;
+	} else if (strcmp(var, "core.worktree") == 0) {
+		if (git_work_tree_cfg)
+			free(git_work_tree_cfg);
+		git_work_tree_cfg = xstrdup(value);
+		inside_work_tree = -1;
+	}
 	return 0;
 }
 
@@ -402,5 +366,16 @@ const char *setup_git_directory(void)
 {
 	const char *retval = setup_git_directory_gently(NULL);
 	check_repository_format();
+
+	/* If the work tree is not the default one, recompute prefix */
+	if (inside_work_tree < 0) {
+		static char buffer[PATH_MAX + 1];
+		char *rel;
+		if (retval && chdir(retval))
+			die ("Could not jump back into original cwd");
+		rel = get_relative_cwd(buffer, PATH_MAX, get_git_work_tree());
+		return rel && *rel ? strcat(rel, "/") : NULL;
+	}
+
 	return retval;
 }
diff --git a/t/t1500-rev-parse.sh b/t/t1500-rev-parse.sh
index ec4996637d..bea40cba8d 100755
--- a/t/t1500-rev-parse.sh
+++ b/t/t1500-rev-parse.sh
@@ -31,9 +31,9 @@ test_rev_parse() {
 test_rev_parse toplevel false false true ''
 
 cd .git || exit 1
-test_rev_parse .git/ false true true .git/
+test_rev_parse .git/ true true false ''
 cd objects || exit 1
-test_rev_parse .git/objects/ false true true .git/objects/
+test_rev_parse .git/objects/ true true false ''
 cd ../.. || exit 1
 
 mkdir -p sub/dir || exit 1
@@ -42,7 +42,7 @@ test_rev_parse subdirectory false false true sub/dir/
 cd ../.. || exit 1
 
 git config core.bare true
-test_rev_parse 'core.bare = true' true false true
+test_rev_parse 'core.bare = true' true false false
 
 git config --unset core.bare
 test_rev_parse 'core.bare undefined' false false true
@@ -50,28 +50,28 @@ test_rev_parse 'core.bare undefined' false false true
 mkdir work || exit 1
 cd work || exit 1
 export GIT_DIR=../.git
-export GIT_CONFIG="$GIT_DIR"/config
+export GIT_CONFIG="$(pwd)"/../.git/config
 
 git config core.bare false
-test_rev_parse 'GIT_DIR=../.git, core.bare = false' false false true ''
+test_rev_parse 'GIT_DIR=../.git, core.bare = false' false false true work/
 
 git config core.bare true
-test_rev_parse 'GIT_DIR=../.git, core.bare = true' true false true ''
+test_rev_parse 'GIT_DIR=../.git, core.bare = true' true false false ''
 
 git config --unset core.bare
-test_rev_parse 'GIT_DIR=../.git, core.bare undefined' false false true ''
+test_rev_parse 'GIT_DIR=../.git, core.bare undefined' false false true work/
 
 mv ../.git ../repo.git || exit 1
 export GIT_DIR=../repo.git
-export GIT_CONFIG="$GIT_DIR"/config
+export GIT_CONFIG="$(pwd)"/../repo.git/config
 
 git config core.bare false
 test_rev_parse 'GIT_DIR=../repo.git, core.bare = false' false false true ''
 
 git config core.bare true
-test_rev_parse 'GIT_DIR=../repo.git, core.bare = true' true false true ''
+test_rev_parse 'GIT_DIR=../repo.git, core.bare = true' true false false ''
 
 git config --unset core.bare
-test_rev_parse 'GIT_DIR=../repo.git, core.bare undefined' true false true ''
+test_rev_parse 'GIT_DIR=../repo.git, core.bare undefined' false false true ''
 
 test_done
diff --git a/t/t1501-worktree.sh b/t/t1501-worktree.sh
index aadeeab9ab..732216184f 100755
--- a/t/t1501-worktree.sh
+++ b/t/t1501-worktree.sh
@@ -33,17 +33,17 @@ mv .git repo.git || exit 1
 
 say "core.worktree = relative path"
 export GIT_DIR=repo.git
-export GIT_CONFIG=$GIT_DIR/config
+export GIT_CONFIG="$(pwd)"/$GIT_DIR/config
 unset GIT_WORK_TREE
 git config core.worktree ../work
 test_rev_parse 'outside'      false false false
 cd work || exit 1
 export GIT_DIR=../repo.git
-export GIT_CONFIG=$GIT_DIR/config
+export GIT_CONFIG="$(pwd)"/$GIT_DIR/config
 test_rev_parse 'inside'       false false true ''
 cd sub/dir || exit 1
 export GIT_DIR=../../../repo.git
-export GIT_CONFIG=$GIT_DIR/config
+export GIT_CONFIG="$(pwd)"/$GIT_DIR/config
 test_rev_parse 'subdirectory' false false true sub/dir/
 cd ../../.. || exit 1
 
@@ -84,9 +84,23 @@ test_rev_parse 'in repo.git'              false true  false
 cd objects || exit 1
 test_rev_parse 'in repo.git/objects'      false true  false
 cd ../work || exit 1
-test_rev_parse 'in repo.git/work'         false false true ''
+test_rev_parse 'in repo.git/work'         false true true ''
 cd sub/dir || exit 1
-test_rev_parse 'in repo.git/sub/dir' false false true sub/dir/
+test_rev_parse 'in repo.git/sub/dir' false true true sub/dir/
 cd ../../../.. || exit 1
 
+test_expect_success 'repo finds its work tree' '
+	(cd repo.git &&
+	 : > work/sub/dir/untracked &&
+	 test sub/dir/untracked = "$(git ls-files --others)")
+'
+
+test_expect_success 'repo finds its work tree from work tree, too' '
+	(cd repo.git/work/sub/dir &&
+	 : > tracked &&
+	 git --git-dir=../../.. add tracked &&
+	 cd ../../.. &&
+	 test sub/dir/tracked = "$(git ls-files)")
+'
+
 test_done