diff --git a/Cargo.lock b/Cargo.lock
index 77ccfe789f121f9358acc79507f4d6419b37ed20..2157d065f2c1e0bf13fb8d402ea0f2970579d1bd 100644
--- a/Cargo.lock
+++ b/Cargo.lock
@@ -17658,7 +17658,11 @@ dependencies = [
  "pretty_assertions",
  "project",
  "regex",
+ "release_channel",
+ "remote",
+ "rpc",
  "schemars",
+ "semver",
  "serde",
  "serde_json",
  "settings",
diff --git a/crates/terminal_view/Cargo.toml b/crates/terminal_view/Cargo.toml
index f74d8b83883a1186d91855429c40f375bfa22526..9da4c5ec6e1cf5412a3e4d1f3a677551dd5b2688 100644
--- a/crates/terminal_view/Cargo.toml
+++ b/crates/terminal_view/Cargo.toml
@@ -51,6 +51,10 @@ zed_actions.workspace = true
 editor = { workspace = true, features = ["test-support"] }
 gpui = { workspace = true, features = ["test-support"] }
 project = { workspace = true, features = ["test-support"] }
+remote = { workspace = true, features = ["test-support"] }
+release_channel.workspace = true
+rpc = { workspace = true, features = ["test-support"] }
+semver.workspace = true
 terminal = { workspace = true, features = ["test-support"] }
 workspace = { workspace = true, features = ["test-support"] }
 
diff --git a/crates/terminal_view/src/terminal_view.rs b/crates/terminal_view/src/terminal_view.rs
index 636ce30e6e243f49767fbe3c248319a8bc94b9f7..5c772c18f19fb12d77c2100d602aab08e635b1d2 100644
--- a/crates/terminal_view/src/terminal_view.rs
+++ b/crates/terminal_view/src/terminal_view.rs
@@ -1971,8 +1971,9 @@ impl SearchableItem for TerminalView {
 }
 
 /// Gets the working directory for the given workspace, respecting the user's settings.
-/// Falls back to home directory when no project directory is available.
+/// Falls back to the local home directory only for local workspaces.
 pub(crate) fn default_working_directory(workspace: &Workspace, cx: &App) -> Option<PathBuf> {
+    let should_fallback_to_local_home = workspace.project().read(cx).is_local();
     let directory = match &TerminalSettings::get_global(cx).working_directory {
         WorkingDirectory::CurrentFileDirectory => workspace
             .project()
@@ -1987,7 +1988,12 @@ pub(crate) fn default_working_directory(workspace: &Workspace, cx: &App) -> Opti
             .map(|dir| Path::new(&dir.to_string()).to_path_buf())
             .filter(|dir| dir.is_dir()),
     };
-    directory.or_else(dirs::home_dir)
+
+    if should_fallback_to_local_home {
+        directory.or_else(dirs::home_dir)
+    } else {
+        directory
+    }
 }
 
 fn current_project_directory(workspace: &Workspace, cx: &App) -> Option<PathBuf> {
@@ -2017,6 +2023,7 @@ mod tests {
     use super::*;
     use gpui::TestAppContext;
     use project::{Entry, Project, ProjectPath, Worktree};
+    use remote::RemoteClient;
     use std::path::{Path, PathBuf};
     use util::paths::PathStyle;
     use util::rel_path::RelPath;
@@ -2079,6 +2086,22 @@ mod tests {
         });
     }
 
+    #[gpui::test]
+    async fn remote_no_worktree_uses_remote_shell_default_cwd(
+        cx: &mut TestAppContext,
+        server_cx: &mut TestAppContext,
+    ) {
+        let (_project, workspace) = init_remote_test(cx, server_cx).await;
+
+        cx.read(|cx| {
+            let workspace = workspace.read(cx);
+
+            assert!(workspace.project().read(cx).is_remote());
+            assert!(workspace.worktrees(cx).next().is_none());
+            assert_eq!(default_working_directory(workspace, cx), None);
+        });
+    }
+
     // No active entry, but a worktree, worktree is a file -> parent directory
     #[gpui::test]
     async fn no_active_entry_worktree_is_file(cx: &mut TestAppContext) {
@@ -2237,6 +2260,64 @@ mod tests {
         (project, workspace, window_handle)
     }
 
+    async fn init_remote_test(
+        cx: &mut TestAppContext,
+        server_cx: &mut TestAppContext,
+    ) -> (Entity<Project>, Entity<Workspace>) {
+        cx.update(|cx| {
+            release_channel::init(semver::Version::new(0, 0, 0), cx);
+        });
+        server_cx.update(|cx| {
+            release_channel::init(semver::Version::new(0, 0, 0), cx);
+        });
+
+        let params = cx.update(AppState::test);
+        let (opts, server_session, connect_guard) = RemoteClient::fake_server(cx, server_cx);
+        let ping_handler = server_cx.new(|_| ());
+        server_session.add_request_handler::<rpc::proto::Ping, _, _, _>(
+            ping_handler.downgrade(),
+            |_entity, _envelope, _cx| async { Ok(rpc::proto::Ack {}) },
+        );
+        drop(connect_guard);
+
+        let remote_client = RemoteClient::connect_mock(opts, cx).await;
+        let project = cx.update(|cx| {
+            Project::remote(
+                remote_client,
+                params.client.clone(),
+                params.node_runtime.clone(),
+                params.user_store.clone(),
+                params.languages.clone(),
+                params.fs.clone(),
+                false,
+                cx,
+            )
+        });
+
+        let window_handle = cx.add_window({
+            let params = params.clone();
+            let project_for_workspace = project.clone();
+            move |window, cx| {
+                window.activate_window();
+                let workspace = cx.new(|cx| {
+                    Workspace::new(
+                        None,
+                        project_for_workspace.clone(),
+                        params.clone(),
+                        window,
+                        cx,
+                    )
+                });
+                MultiWorkspace::new(workspace, window, cx)
+            }
+        });
+        let workspace = window_handle
+            .read_with(cx, |mw, _| mw.workspace().clone())
+            .unwrap();
+
+        (project, workspace)
+    }
+
     /// Creates a file in the given worktree and returns its entry.
     async fn create_file_in_worktree(
         worktree: Entity<Worktree>,