diff --git a/bundle/deploy/terraform/init.go b/bundle/deploy/terraform/init.go
index 98c2bbef..3af8a6f6 100644
--- a/bundle/deploy/terraform/init.go
+++ b/bundle/deploy/terraform/init.go
@@ -6,6 +6,7 @@ import (
 	"os"
 	"os/exec"
 	"path/filepath"
+	"runtime"
 	"strings"
 
 	"github.com/databricks/cli/bundle"
@@ -69,6 +70,44 @@ func (m *initialize) findExecPath(ctx context.Context, b *bundle.Bundle, tf *con
 	return tf.ExecPath, nil
 }
 
+// This function sets temp dir location for terraform to use. If user does not
+// specify anything here, we fall back to a `tmp` directory in the bundle's cache
+// directory
+//
+// This is necessary to avoid trying to create temporary files in directories
+// the CLI and its dependencies do not have access to.
+//
+// see: os.TempDir for more context
+func setTempDirEnvVars(env map[string]string, b *bundle.Bundle) error {
+	switch runtime.GOOS {
+	case "windows":
+		if v, ok := os.LookupEnv("TMP"); ok {
+			env["TMP"] = v
+		} else if v, ok := os.LookupEnv("TEMP"); ok {
+			env["TEMP"] = v
+		} else if v, ok := os.LookupEnv("USERPROFILE"); ok {
+			env["USERPROFILE"] = v
+		} else {
+			tmpDir, err := b.CacheDir("tmp")
+			if err != nil {
+				return err
+			}
+			env["TMP"] = tmpDir
+		}
+	default:
+		if v, ok := os.LookupEnv("TMPDIR"); ok {
+			env["TMPDIR"] = v
+		} else {
+			tmpDir, err := b.CacheDir("tmp")
+			if err != nil {
+				return err
+			}
+			env["TMPDIR"] = tmpDir
+		}
+	}
+	return nil
+}
+
 func (m *initialize) Apply(ctx context.Context, b *bundle.Bundle) ([]bundle.Mutator, error) {
 	tfConfig := b.Config.Bundle.Terraform
 	if tfConfig == nil {
@@ -102,6 +141,12 @@ func (m *initialize) Apply(ctx context.Context, b *bundle.Bundle) ([]bundle.Muta
 		env["HOME"] = home
 	}
 
+	// Set the temporary directory environment variables
+	err = setTempDirEnvVars(env, b)
+	if err != nil {
+		return nil, err
+	}
+
 	// Configure environment variables for auth for Terraform to use.
 	log.Debugf(ctx, "Environment variables for Terraform: %s", strings.Join(maps.Keys(env), ", "))
 	err = tf.SetEnv(env)
diff --git a/bundle/deploy/terraform/init_test.go b/bundle/deploy/terraform/init_test.go
index 251e4931..c52aa19d 100644
--- a/bundle/deploy/terraform/init_test.go
+++ b/bundle/deploy/terraform/init_test.go
@@ -2,14 +2,23 @@ package terraform
 
 import (
 	"context"
+	"os"
 	"os/exec"
+	"runtime"
 	"testing"
 
 	"github.com/databricks/cli/bundle"
 	"github.com/databricks/cli/bundle/config"
+	"github.com/stretchr/testify/assert"
 	"github.com/stretchr/testify/require"
 )
 
+func unsetEnv(t *testing.T, name string) {
+	t.Setenv(name, "")
+	err := os.Unsetenv(name)
+	require.NoError(t, err)
+}
+
 func TestInitEnvironmentVariables(t *testing.T) {
 	_, err := exec.LookPath("terraform")
 	if err != nil {
@@ -37,3 +46,183 @@ func TestInitEnvironmentVariables(t *testing.T) {
 	_, err = Initialize().Apply(context.Background(), bundle)
 	require.NoError(t, err)
 }
+
+func TestSetTempDirEnvVarsForUnixWithTmpDirSet(t *testing.T) {
+	if runtime.GOOS != "darwin" && runtime.GOOS != "linux" {
+		t.SkipNow()
+	}
+
+	b := &bundle.Bundle{
+		Config: config.Root{
+			Path: t.TempDir(),
+			Bundle: config.Bundle{
+				Environment: "whatever",
+			},
+		},
+	}
+
+	// Set TMPDIR environment variable
+	t.Setenv("TMPDIR", "/foo/bar")
+
+	// compute env
+	env := make(map[string]string, 0)
+	err := setTempDirEnvVars(env, b)
+	require.NoError(t, err)
+
+	// assert that we pass through env var value
+	assert.Equal(t, map[string]string{
+		"TMPDIR": "/foo/bar",
+	}, env)
+}
+
+func TestSetTempDirEnvVarsForUnixWithTmpDirNotSet(t *testing.T) {
+	if runtime.GOOS != "darwin" && runtime.GOOS != "linux" {
+		t.SkipNow()
+	}
+
+	b := &bundle.Bundle{
+		Config: config.Root{
+			Path: t.TempDir(),
+			Bundle: config.Bundle{
+				Environment: "whatever",
+			},
+		},
+	}
+
+	// Unset TMPDIR environment variable confirm it's not set
+	unsetEnv(t, "TMPDIR")
+
+	// compute env
+	env := make(map[string]string, 0)
+	err := setTempDirEnvVars(env, b)
+	require.NoError(t, err)
+
+	// assert tmp dir is set to b.CacheDir("tmp")
+	tmpDir, err := b.CacheDir("tmp")
+	require.NoError(t, err)
+	assert.Equal(t, map[string]string{
+		"TMPDIR": tmpDir,
+	}, env)
+}
+
+func TestSetTempDirEnvVarsForWindowWithAllTmpDirEnvVarsSet(t *testing.T) {
+	if runtime.GOOS != "windows" {
+		t.SkipNow()
+	}
+
+	b := &bundle.Bundle{
+		Config: config.Root{
+			Path: t.TempDir(),
+			Bundle: config.Bundle{
+				Environment: "whatever",
+			},
+		},
+	}
+
+	// Set environment variables
+	t.Setenv("TMP", "c:\\foo\\a")
+	t.Setenv("TEMP", "c:\\foo\\b")
+	t.Setenv("USERPROFILE", "c:\\foo\\c")
+
+	// compute env
+	env := make(map[string]string, 0)
+	err := setTempDirEnvVars(env, b)
+	require.NoError(t, err)
+
+	// assert that we pass through the highest priority env var value
+	assert.Equal(t, map[string]string{
+		"TMP": "c:\\foo\\a",
+	}, env)
+}
+
+func TestSetTempDirEnvVarsForWindowWithUserProfileAndTempSet(t *testing.T) {
+	if runtime.GOOS != "windows" {
+		t.SkipNow()
+	}
+
+	b := &bundle.Bundle{
+		Config: config.Root{
+			Path: t.TempDir(),
+			Bundle: config.Bundle{
+				Environment: "whatever",
+			},
+		},
+	}
+
+	// Set environment variables
+	unsetEnv(t, "TMP")
+	t.Setenv("TEMP", "c:\\foo\\b")
+	t.Setenv("USERPROFILE", "c:\\foo\\c")
+
+	// compute env
+	env := make(map[string]string, 0)
+	err := setTempDirEnvVars(env, b)
+	require.NoError(t, err)
+
+	// assert that we pass through the highest priority env var value
+	assert.Equal(t, map[string]string{
+		"TEMP": "c:\\foo\\b",
+	}, env)
+}
+
+func TestSetTempDirEnvVarsForWindowWithUserProfileSet(t *testing.T) {
+	if runtime.GOOS != "windows" {
+		t.SkipNow()
+	}
+
+	b := &bundle.Bundle{
+		Config: config.Root{
+			Path: t.TempDir(),
+			Bundle: config.Bundle{
+				Environment: "whatever",
+			},
+		},
+	}
+
+	// Set environment variables
+	unsetEnv(t, "TMP")
+	unsetEnv(t, "TEMP")
+	t.Setenv("USERPROFILE", "c:\\foo\\c")
+
+	// compute env
+	env := make(map[string]string, 0)
+	err := setTempDirEnvVars(env, b)
+	require.NoError(t, err)
+
+	// assert that we pass through the user profile
+	assert.Equal(t, map[string]string{
+		"USERPROFILE": "c:\\foo\\c",
+	}, env)
+}
+
+func TestSetTempDirEnvVarsForWindowsWithoutAnyTempDirEnvVarsSet(t *testing.T) {
+	if runtime.GOOS != "windows" {
+		t.SkipNow()
+	}
+
+	b := &bundle.Bundle{
+		Config: config.Root{
+			Path: t.TempDir(),
+			Bundle: config.Bundle{
+				Environment: "whatever",
+			},
+		},
+	}
+
+	// unset all env vars
+	unsetEnv(t, "TMP")
+	unsetEnv(t, "TEMP")
+	unsetEnv(t, "USERPROFILE")
+
+	// compute env
+	env := make(map[string]string, 0)
+	err := setTempDirEnvVars(env, b)
+	require.NoError(t, err)
+
+	// assert TMP is set to b.CacheDir("tmp")
+	tmpDir, err := b.CacheDir("tmp")
+	require.NoError(t, err)
+	assert.Equal(t, map[string]string{
+		"TMP": tmpDir,
+	}, env)
+}