diff --git a/src/cargo/sources/path.rs b/src/cargo/sources/path.rs
index 0cc6399766e..7ba7c3692a7 100644
--- a/src/cargo/sources/path.rs
+++ b/src/cargo/sources/path.rs
@@ -327,7 +327,12 @@ impl<'cfg> PathSource<'cfg> {
 
             match file_path.file_name().and_then(|s| s.to_str()) {
                 // The `target` directory is never included.
-                Some("target") => continue,
+                Some("target") => {
+                    // Only filter out target if its in the package root.
+                    if file_path.parent().unwrap() == pkg_path {
+                        continue;
+                    }
+                }
 
                 // Keep track of all sub-packages found and also strip out all
                 // matches we've found so far. Note, though, that if we find
diff --git a/tests/testsuite/package.rs b/tests/testsuite/package.rs
index 4ec4fc0d6fc..2e7c05a342d 100644
--- a/tests/testsuite/package.rs
+++ b/tests/testsuite/package.rs
@@ -5,6 +5,7 @@ use cargo_test_support::publish::validate_crate_contents;
 use cargo_test_support::registry::{self, Package};
 use cargo_test_support::{
     basic_manifest, cargo_process, git, path2url, paths, project, symlink_supported, t,
+    ProjectBuilder,
 };
 use flate2::read::GzDecoder;
 use std::fs::{self, read_to_string, File};
@@ -3132,3 +3133,93 @@ See https://doc.rust-lang.org/cargo/reference/manifest.html#package-metadata for
         &[],
     );
 }
+
+#[cargo_test]
+fn include_files_called_target_project() {
+    // /~https://github.com/rust-lang/cargo/issues/12790
+    // files and folders called "target" should be included, unless they're the actual target directory
+    let p = init_and_add_inner_target(project())
+        .file("target/foo.txt", "")
+        .build();
+
+    p.cargo("package -l")
+        .with_stdout(
+            "\
+Cargo.lock
+Cargo.toml
+Cargo.toml.orig
+data/not_target
+data/target
+derp/not_target/foo.txt
+derp/target/foo.txt
+src/main.rs
+",
+        )
+        .run();
+}
+
+#[cargo_test]
+fn include_files_called_target_git() {
+    // /~https://github.com/rust-lang/cargo/issues/12790
+    // files and folders called "target" should be included, unless they're the actual target directory
+    let (p, repo) = git::new_repo("foo", |p| init_and_add_inner_target(p));
+    // add target folder but not committed.
+    _ = fs::create_dir(p.build_dir()).unwrap();
+    _ = fs::write(p.build_dir().join("foo.txt"), "").unwrap();
+    p.cargo("package -l")
+        .with_stdout(
+            "\
+.cargo_vcs_info.json
+Cargo.lock
+Cargo.toml
+Cargo.toml.orig
+data/not_target
+data/target
+derp/not_target/foo.txt
+derp/target/foo.txt
+src/main.rs
+",
+        )
+        .run();
+
+    // if target is committed, it should be include.
+    git::add(&repo);
+    git::commit(&repo);
+    p.cargo("package -l")
+        .with_stdout(
+            "\
+.cargo_vcs_info.json
+Cargo.lock
+Cargo.toml
+Cargo.toml.orig
+data/not_target
+data/target
+derp/not_target/foo.txt
+derp/target/foo.txt
+src/main.rs
+target/foo.txt
+",
+        )
+        .run();
+}
+
+fn init_and_add_inner_target(p: ProjectBuilder) -> ProjectBuilder {
+    p.file(
+        "Cargo.toml",
+        r#"
+                [package]
+                name = "foo"
+                version = "0.0.1"
+                authors = []
+                license = "MIT"
+                description = "foo"
+            "#,
+    )
+    .file("src/main.rs", r#"fn main() { println!("hello"); }"#)
+    // file called target, should be included
+    .file("data/target", "")
+    .file("data/not_target", "")
+    // folder called target, should be included
+    .file("derp/target/foo.txt", "")
+    .file("derp/not_target/foo.txt", "")
+}