ICloud – Create a location on the Mac where iCloud will not be used

I'm afraid not. iCloud is designed for iOS devices without a user accessible file system. iCloud files are strictly associated with apps and only allow one level of folder nesting.

If you're not happy with this, you can send feedback to Apple about it here: http://www.apple.com/feedback/icloud.html

You could use Dropbox instead (https://www.dropbox.com/) which has more flexibility around file organisation. The downside is that you only get 2GB free but you can earn more free storage in various ways. Google Drive (https://drive.google.com/start#home) gives you 5GB free.

Doesn't look like there's a way to single out the Desktop via the 'Manage Storage' GUI.

However, you can always just symlink any directory from your iCloud drive; that way you can ensure that only the Desktop folder is being synced. This is with the caveat that while your Desktop files are being stored in iCloud, they're still taking up space on your HD before, during, and after sync. If you do it on every Mac then you'll keep your Desktop in sync between them all (files added, deleted, changed etc); this might not be what you're after though.

If symlinking isn't something you know how to do, instructions are below.

Backup (via TimeMachine or whatever you use).

Then fire up Terminal and run the following to move your Desktop folder into your iCloud Drive:

mv ~/Desktop /Users/<yourusername>/Library/Mobile\ Documents/com~apple~CloudDocs/

Then just symlink it to the usual 'Desktop' location:

ln -s /Users/<yourusername>/Library/Mobile\ Documents/com~apple~CloudDocs/Desktop /Users/<yourusername>/Desktop

Now anything that you add to ~/Desktop (by dropping things onto your desktop etc) will actually be dropped into your iCloud drive. They are of course still taking up local space on your machine. When you delete something from your desktop then it's gone from the 'Cloud' as well. The benefits of this are more for sync between machines (+ access via your iPhone of course).

If you've got another mac, move anything you value from it's desktop folder into your iCloud Drive 'Desktop' folder first, then delete ~/Desktop on that machine and symlink again as above.