diff --git a/packages/kilo-vscode/tests/unit/markdown-annotation-layer.test.ts b/packages/kilo-vscode/tests/unit/markdown-annotation-layer.test.ts
index 82865d18c43..5939986abf9 100644
--- a/packages/kilo-vscode/tests/unit/markdown-annotation-layer.test.ts
+++ b/packages/kilo-vscode/tests/unit/markdown-annotation-layer.test.ts
@@ -1,15 +1,20 @@
 import { describe, expect, it } from "bun:test"
-import { readFileSync } from "node:fs"
-import { join } from "node:path"
+import { isAnnotationMutation } from "../../webview-ui/agent-manager/MarkdownAnnotationLayer"
 
-const file = join(import.meta.dir, "../../webview-ui/agent-manager/MarkdownAnnotationLayer.tsx")
-const src = readFileSync(file, "utf8")
+function mutation(target: Node): Pick<MutationRecord, "target"> {
+  return { target }
+}
 
-describe("MarkdownAnnotationLayer", () => {
-  it("ignores inline annotation DOM mutations while watching rendered Markdown", () => {
-    expect(src).toMatch(/function isAnnotationMutation[\s\S]*target\.closest\(selector\)/)
-    expect(src).toMatch(
-      /new MutationObserver\(\(mutations\) => \{[\s\S]*mutations\.every\(isAnnotationMutation\)[\s\S]*schedule\(\)/,
-    )
+describe("isAnnotationMutation", () => {
+  it("matches nested annotation DOM mutations", () => {
+    const target = { closest: () => ({}) } as unknown as Node
+    expect(isAnnotationMutation(mutation(target))).toBe(true)
+  })
+
+  it("keeps external Markdown DOM mutations observable", () => {
+    const markdown = { closest: () => null } as unknown as Node
+    const plain = {} as Node
+    expect(isAnnotationMutation(mutation(markdown))).toBe(false)
+    expect(isAnnotationMutation(mutation(plain))).toBe(false)
   })
 })
diff --git a/packages/kilo-vscode/webview-ui/agent-manager/MarkdownAnnotationLayer.tsx b/packages/kilo-vscode/webview-ui/agent-manager/MarkdownAnnotationLayer.tsx
index 707b3b37fbb..2ed9ce2fb83 100644
--- a/packages/kilo-vscode/webview-ui/agent-manager/MarkdownAnnotationLayer.tsx
+++ b/packages/kilo-vscode/webview-ui/agent-manager/MarkdownAnnotationLayer.tsx
@@ -90,9 +90,11 @@ function matches(annotation: DiffLineAnnotation<AnnotationMeta>, anchor: Anchor,
 
 const selector = ".am-markdown-inline-annotations, .am-markdown-list-annotation, .am-markdown-table-annotation"
 
-function isAnnotationMutation(mutation: MutationRecord): boolean {
+// Keep host insertion observable, only nested annotation UI updates are safe to ignore.
+export function isAnnotationMutation(mutation: Pick<MutationRecord, "target">): boolean {
   const target = mutation.target
-  if (!(target instanceof Element)) return false
+  if (!("closest" in target)) return false
+  if (typeof target.closest !== "function") return false
   return target.closest(selector) !== null
 }
 
@@ -213,7 +215,7 @@ export const MarkdownAnnotationLayer: Component<MarkdownAnnotationLayerProps> =
     if (!root) return
     observer?.disconnect()
     observer = new MutationObserver((mutations) => {
-      if (mutations.length > 0 && mutations.every(isAnnotationMutation)) return
+      if (mutations.every(isAnnotationMutation)) return
       schedule()
     })
     observer.observe(root, { childList: true, subtree: true })