diff --git a/packages/cli/src/context/core/git.service.ts b/packages/cli/src/context/core/git.service.ts
index f9942dac..63da5f8c 100644
--- a/packages/cli/src/context/core/git.service.ts
+++ b/packages/cli/src/context/core/git.service.ts
@@ -48,8 +48,11 @@ function isNodeErrnoException(error: unknown): error is NodeJS.ErrnoException {
 /**
  * Classify whether ktx may own a git repository rooted exactly at `dir`.
  *
- * - `unowned`: no `<dir>/.git` exists → ktx can `git init` here. Covers a fresh
- *   standalone directory and a fresh directory nested inside a parent repo.
+ * - `unowned`: there is no git repository for ktx to avoid here → ktx may
+ *   `git init`. Covers a fresh standalone directory, a fresh directory nested
+ *   inside a parent repo, a path that does not exist yet, and a path that is not
+ *   a directory at all (whether the path is a usable project directory is a
+ *   separate concern for the caller to validate).
  * - `ktx-managed`: `<dir>/.git` is a directory carrying ktx's ownership marker.
  * - `foreign`: a repo ktx did not create — a `.git` directory without the marker,
  *   or a `.git` *file* (a linked worktree). ktx must never adopt or mutate it.
@@ -64,7 +67,9 @@ export async function classifyKtxRepoOwnership(dir: string): Promise<KtxRepoOwne
   try {
     dotGitIsDirectory = (await fs.lstat(join(dir, '.git'))).isDirectory();
   } catch (error) {
-    if (isNodeErrnoException(error) && error.code === 'ENOENT') {
+    // ENOENT: `<dir>/.git` is absent. ENOTDIR: `<dir>` itself is a file, so it
+    // can hold no repo. Either way there is nothing for ktx to avoid here.
+    if (isNodeErrnoException(error) && (error.code === 'ENOENT' || error.code === 'ENOTDIR')) {
       return 'unowned';
     }
     throw error;
diff --git a/packages/cli/test/context/core/git.service.repo-isolation.test.ts b/packages/cli/test/context/core/git.service.repo-isolation.test.ts
index 0061c8ff..f5493ad3 100644
--- a/packages/cli/test/context/core/git.service.repo-isolation.test.ts
+++ b/packages/cli/test/context/core/git.service.repo-isolation.test.ts
@@ -151,4 +151,10 @@ describe('classifyKtxRepoOwnership', () => {
     await writeFile(join(dir, '.git'), 'gitdir: ../actual.git\n', 'utf-8');
     expect(await classifyKtxRepoOwnership(dir)).toBe('foreign');
   });
+
+  it('reports unowned when the path is itself a file', async () => {
+    const filePath = join(tempDir, 'notes.txt');
+    await writeFile(filePath, 'a file, not a folder\n', 'utf-8');
+    expect(await classifyKtxRepoOwnership(filePath)).toBe('unowned');
+  });
 });
diff --git a/packages/cli/test/setup-project.test.ts b/packages/cli/test/setup-project.test.ts
index ba9a625b..1f0eae4d 100644
--- a/packages/cli/test/setup-project.test.ts
+++ b/packages/cli/test/setup-project.test.ts
@@ -344,6 +344,24 @@ describe('setup project step', () => {
     await expect(stat(join(projectDir, 'ktx.yaml'))).rejects.toThrow();
   });
 
+  it('rejects a custom path that points at an existing file without crashing', async () => {
+    const startDir = join(tempDir, 'start');
+    await mkdir(startDir, { recursive: true });
+    await writeFile(join(startDir, 'notes.txt'), 'a file, not a folder\n', 'utf-8');
+    const prompts = makePromptAdapter({ choices: ['new-custom'], textValue: 'notes.txt' });
+    const testIo = makeIo({ stdoutIsTty: true });
+
+    await expect(
+      runKtxSetupProjectStep(
+        { projectDir: startDir, mode: 'auto', inputMode: 'auto', yes: false },
+        testIo.io,
+        { prompts },
+      ),
+    ).resolves.toMatchObject({ status: 'missing-input', projectDir: startDir });
+
+    expect(testIo.stderr()).toContain('exists and is not a directory');
+  });
+
   it('prompts to exit and returns cancelled in interactive auto mode', async () => {
     const projectDir = join(tempDir, 'warehouse');
     const prompts = makePromptAdapter({ choice: 'exit' });