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Introduction Mild cognitive impairment (MCI) is characterized by subtle deficits that functional assessment via informant‐report measures may not detect. Sensors can potentially detect deficits in everyday functioning in MCI. This study aims to establish feasibility and acceptability of using sensors in a smart home for performance‐based assessments of two instrumental activities of daily living (IADLs). Methods Thirty‐five older adults (>65 years) performed two IADL tasks in a smart home laboratory equipped with sensors and a web camera. Participants’ cognitive states were determined using published criteria including measures of global cognition and comprehensive neuropsychological test batteries. Selected subtasks of the IADL assessment were autonomously captured by the sensors. Total time taken for each task and subtask were computed. A point scoring system captured accuracy and number of attempts. Acceptability of the smart home setup was assessed. Results Participants with MCI (n = 21) took longer to complete both tasks than participants with healthy cognition (HC; n = 14), with significant time differences observed only in "Cost calculation." Completion time for IADL tasks and scores correlated in the expected direction with global cognition. Over 95% of the participants found the smart home assessment acceptable and a positive experience. Discussion We demonstrated the feasibility and acceptability of the use of unobtrusive commercially available sensors in a smart home for facilitating parts of the objective assessment of IADL in older adults. Future studies need to identify more IADLs that are suitable for semi‐automated or automated assessments through the use of simple, low‐cost sensors.