diff --git a/packages/schematics/src/collection/application/application.spec.ts b/packages/schematics/src/collection/application/application.spec.ts
index c56fc2b872..df2631e739 100644
--- a/packages/schematics/src/collection/application/application.spec.ts
+++ b/packages/schematics/src/collection/application/application.spec.ts
@@ -303,6 +303,17 @@ describe('app', () => {
         'apps/my-app/tsconfig.app.json',
         'apps/my-app/tsconfig.spec.json'
       ]);
+      const tsconfigAppJson = readJsonInTree(
+        tree,
+        'apps/my-app/tsconfig.app.json'
+      );
+      expect(tsconfigAppJson.exclude).toEqual([
+        'src/test-setup.ts',
+        '**/*.spec.ts'
+      ]);
+      expect(tsconfigAppJson.compilerOptions.outDir).toEqual(
+        '../../dist/out-tsc/apps/my-app'
+      );
     });
   });
 
diff --git a/packages/schematics/src/collection/application/index.ts b/packages/schematics/src/collection/application/index.ts
index 7536d26376..8c736eaea0 100644
--- a/packages/schematics/src/collection/application/index.ts
+++ b/packages/schematics/src/collection/application/index.ts
@@ -175,7 +175,6 @@ function updateProject(options: NormalizedSchema): Rule {
         return json;
       }),
       updateJsonInTree(`${options.appProjectRoot}/tsconfig.app.json`, json => {
-        json.exclude = json.exclude || [];
         return {
           ...json,
           extends: `${offsetFromRoot(options.appProjectRoot)}tsconfig.json`,
@@ -185,6 +184,10 @@ function updateProject(options: NormalizedSchema): Rule {
               options.appProjectRoot
             }`
           },
+          exclude:
+            options.unitTestRunner === 'jest'
+              ? ['src/test-setup.ts', '**/*.spec.ts']
+              : json.exclude || [],
           include: ['**/*.ts']
         };
       }),