diff --git a/apps/server/src/lib/sdk-options.ts b/apps/server/src/lib/sdk-options.ts
index 327ec059..d9b78398 100644
--- a/apps/server/src/lib/sdk-options.ts
+++ b/apps/server/src/lib/sdk-options.ts
@@ -16,6 +16,7 @@
  */
 
 import type { Options } from '@anthropic-ai/claude-agent-sdk';
+import os from 'os';
 import path from 'path';
 import { resolveModelString } from '@automaker/model-resolver';
 import { DEFAULT_MODELS, CLAUDE_MODEL_MAP, type McpServerConfig } from '@automaker/types';
@@ -47,6 +48,128 @@ export function validateWorkingDirectory(cwd: string): void {
   }
 }
 
+/**
+ * Known cloud storage path patterns where sandbox mode is incompatible.
+ *
+ * The Claude CLI sandbox feature uses filesystem isolation that conflicts with
+ * cloud storage providers' virtual filesystem implementations. This causes the
+ * Claude process to exit with code 1 when sandbox is enabled for these paths.
+ *
+ * Affected providers (macOS paths):
+ * - Dropbox: ~/Library/CloudStorage/Dropbox-*
+ * - Google Drive: ~/Library/CloudStorage/GoogleDrive-*
+ * - OneDrive: ~/Library/CloudStorage/OneDrive-*
+ * - iCloud Drive: ~/Library/Mobile Documents/
+ * - Box: ~/Library/CloudStorage/Box-*
+ *
+ * @see https://github.com/anthropics/claude-code/issues/XXX (TODO: file upstream issue)
+ */
+
+/**
+ * macOS-specific cloud storage patterns that appear under ~/Library/
+ * These are specific enough to use with includes() safely.
+ */
+const MACOS_CLOUD_STORAGE_PATTERNS = [
+  '/Library/CloudStorage/', // Dropbox, Google Drive, OneDrive, Box on macOS
+  '/Library/Mobile Documents/', // iCloud Drive on macOS
+] as const;
+
+/**
+ * Generic cloud storage folder names that need to be anchored to the home directory
+ * to avoid false positives (e.g., /home/user/my-project-about-dropbox/).
+ */
+const HOME_ANCHORED_CLOUD_FOLDERS = [
+  'Google Drive', // Google Drive on some systems
+  'Dropbox', // Dropbox on Linux/alternative installs
+  'OneDrive', // OneDrive on Linux/alternative installs
+] as const;
+
+/**
+ * Check if a path is within a cloud storage location.
+ *
+ * Cloud storage providers use virtual filesystem implementations that are
+ * incompatible with the Claude CLI sandbox feature, causing process crashes.
+ *
+ * Uses two detection strategies:
+ * 1. macOS-specific patterns (under ~/Library/) - checked via includes()
+ * 2. Generic folder names - anchored to home directory to avoid false positives
+ *
+ * @param cwd - The working directory path to check
+ * @returns true if the path is in a cloud storage location
+ */
+export function isCloudStoragePath(cwd: string): boolean {
+  const resolvedPath = path.resolve(cwd);
+
+  // Check macOS-specific patterns (these are specific enough to use includes)
+  if (MACOS_CLOUD_STORAGE_PATTERNS.some((pattern) => resolvedPath.includes(pattern))) {
+    return true;
+  }
+
+  // Check home-anchored patterns to avoid false positives
+  // e.g., /home/user/my-project-about-dropbox/ should NOT match
+  const home = os.homedir();
+  for (const folder of HOME_ANCHORED_CLOUD_FOLDERS) {
+    const cloudPath = path.join(home, folder);
+    // Check if resolved path starts with the cloud storage path followed by a separator
+    // This ensures we match ~/Dropbox/project but not ~/Dropbox-archive or ~/my-dropbox-tool
+    if (resolvedPath === cloudPath || resolvedPath.startsWith(cloudPath + path.sep)) {
+      return true;
+    }
+  }
+
+  return false;
+}
+
+/**
+ * Result of sandbox compatibility check
+ */
+export interface SandboxCheckResult {
+  /** Whether sandbox should be enabled */
+  enabled: boolean;
+  /** If disabled, the reason why */
+  disabledReason?: 'cloud_storage' | 'user_setting';
+  /** Human-readable message for logging/UI */
+  message?: string;
+}
+
+/**
+ * Determine if sandbox mode should be enabled for a given configuration.
+ *
+ * Sandbox mode is automatically disabled for cloud storage paths because the
+ * Claude CLI sandbox feature is incompatible with virtual filesystem
+ * implementations used by cloud storage providers (Dropbox, Google Drive, etc.).
+ *
+ * @param cwd - The working directory
+ * @param enableSandboxMode - User's sandbox mode setting
+ * @returns SandboxCheckResult with enabled status and reason if disabled
+ */
+export function checkSandboxCompatibility(
+  cwd: string,
+  enableSandboxMode?: boolean
+): SandboxCheckResult {
+  // User has explicitly disabled sandbox mode
+  if (enableSandboxMode === false) {
+    return {
+      enabled: false,
+      disabledReason: 'user_setting',
+    };
+  }
+
+  // Check for cloud storage incompatibility (applies when enabled or undefined)
+  if (isCloudStoragePath(cwd)) {
+    return {
+      enabled: false,
+      disabledReason: 'cloud_storage',
+      message: `Sandbox mode auto-disabled: Project is in a cloud storage location (${cwd}). The Claude CLI sandbox feature is incompatible with cloud storage filesystems. To use sandbox mode, move your project to a local directory.`,
+    };
+  }
+
+  // Sandbox is compatible and enabled (true or undefined defaults to enabled)
+  return {
+    enabled: true,
+  };
+}
+
 /**
  * Tool presets for different use cases
  */
@@ -381,7 +504,7 @@ export function createSuggestionsOptions(config: CreateSdkOptionsConfig): Option
  * - Full tool access for code modification
  * - Standard turns for interactive sessions
  * - Model priority: explicit model > session model > chat default
- * - Sandbox mode controlled by enableSandboxMode setting
+ * - Sandbox mode controlled by enableSandboxMode setting (auto-disabled for cloud storage)
  * - When autoLoadClaudeMd is true, uses preset mode and settingSources for CLAUDE.md loading
  */
 export function createChatOptions(config: CreateSdkOptionsConfig): Options {
@@ -397,6 +520,9 @@ export function createChatOptions(config: CreateSdkOptionsConfig): Options {
   // Build MCP-related options
   const mcpOptions = buildMcpOptions(config);
 
+  // Check sandbox compatibility (auto-disables for cloud storage paths)
+  const sandboxCheck = checkSandboxCompatibility(config.cwd, config.enableSandboxMode);
+
   return {
     ...getBaseOptions(),
     model: getModelForUseCase('chat', effectiveModel),
@@ -406,7 +532,7 @@ export function createChatOptions(config: CreateSdkOptionsConfig): Options {
     ...(mcpOptions.shouldRestrictTools && { allowedTools: [...TOOL_PRESETS.chat] }),
     // Apply MCP bypass options if configured
     ...mcpOptions.bypassOptions,
-    ...(config.enableSandboxMode && {
+    ...(sandboxCheck.enabled && {
       sandbox: {
         enabled: true,
         autoAllowBashIfSandboxed: true,
@@ -425,7 +551,7 @@ export function createChatOptions(config: CreateSdkOptionsConfig): Options {
  * - Full tool access for code modification and implementation
  * - Extended turns for thorough feature implementation
  * - Uses default model (can be overridden)
- * - Sandbox mode controlled by enableSandboxMode setting
+ * - Sandbox mode controlled by enableSandboxMode setting (auto-disabled for cloud storage)
  * - When autoLoadClaudeMd is true, uses preset mode and settingSources for CLAUDE.md loading
  */
 export function createAutoModeOptions(config: CreateSdkOptionsConfig): Options {
@@ -438,6 +564,9 @@ export function createAutoModeOptions(config: CreateSdkOptionsConfig): Options {
   // Build MCP-related options
   const mcpOptions = buildMcpOptions(config);
 
+  // Check sandbox compatibility (auto-disables for cloud storage paths)
+  const sandboxCheck = checkSandboxCompatibility(config.cwd, config.enableSandboxMode);
+
   return {
     ...getBaseOptions(),
     model: getModelForUseCase('auto', config.model),
@@ -447,7 +576,7 @@ export function createAutoModeOptions(config: CreateSdkOptionsConfig): Options {
     ...(mcpOptions.shouldRestrictTools && { allowedTools: [...TOOL_PRESETS.fullAccess] }),
     // Apply MCP bypass options if configured
     ...mcpOptions.bypassOptions,
-    ...(config.enableSandboxMode && {
+    ...(sandboxCheck.enabled && {
       sandbox: {
         enabled: true,
         autoAllowBashIfSandboxed: true,
diff --git a/apps/server/tests/unit/lib/sdk-options.test.ts b/apps/server/tests/unit/lib/sdk-options.test.ts
index e5d4c7c0..3faea516 100644
--- a/apps/server/tests/unit/lib/sdk-options.test.ts
+++ b/apps/server/tests/unit/lib/sdk-options.test.ts
@@ -1,15 +1,161 @@
 import { describe, it, expect, vi, beforeEach, afterEach } from 'vitest';
+import os from 'os';
 
 describe('sdk-options.ts', () => {
   let originalEnv: NodeJS.ProcessEnv;
+  let homedirSpy: ReturnType<typeof vi.spyOn>;
 
   beforeEach(() => {
     originalEnv = { ...process.env };
     vi.resetModules();
+    // Spy on os.homedir and set default return value
+    homedirSpy = vi.spyOn(os, 'homedir').mockReturnValue('/Users/test');
   });
 
   afterEach(() => {
     process.env = originalEnv;
+    homedirSpy.mockRestore();
+  });
+
+  describe('isCloudStoragePath', () => {
+    it('should detect Dropbox paths on macOS', async () => {
+      const { isCloudStoragePath } = await import('@/lib/sdk-options.js');
+      expect(isCloudStoragePath('/Users/test/Library/CloudStorage/Dropbox-Personal/project')).toBe(
+        true
+      );
+      expect(isCloudStoragePath('/Users/test/Library/CloudStorage/Dropbox/project')).toBe(true);
+    });
+
+    it('should detect Google Drive paths on macOS', async () => {
+      const { isCloudStoragePath } = await import('@/lib/sdk-options.js');
+      expect(
+        isCloudStoragePath('/Users/test/Library/CloudStorage/GoogleDrive-user@gmail.com/project')
+      ).toBe(true);
+    });
+
+    it('should detect OneDrive paths on macOS', async () => {
+      const { isCloudStoragePath } = await import('@/lib/sdk-options.js');
+      expect(isCloudStoragePath('/Users/test/Library/CloudStorage/OneDrive-Personal/project')).toBe(
+        true
+      );
+    });
+
+    it('should detect iCloud Drive paths on macOS', async () => {
+      const { isCloudStoragePath } = await import('@/lib/sdk-options.js');
+      expect(
+        isCloudStoragePath('/Users/test/Library/Mobile Documents/com~apple~CloudDocs/project')
+      ).toBe(true);
+    });
+
+    it('should detect home-anchored Dropbox paths', async () => {
+      const { isCloudStoragePath } = await import('@/lib/sdk-options.js');
+      expect(isCloudStoragePath('/Users/test/Dropbox')).toBe(true);
+      expect(isCloudStoragePath('/Users/test/Dropbox/project')).toBe(true);
+      expect(isCloudStoragePath('/Users/test/Dropbox/nested/deep/project')).toBe(true);
+    });
+
+    it('should detect home-anchored Google Drive paths', async () => {
+      const { isCloudStoragePath } = await import('@/lib/sdk-options.js');
+      expect(isCloudStoragePath('/Users/test/Google Drive')).toBe(true);
+      expect(isCloudStoragePath('/Users/test/Google Drive/project')).toBe(true);
+    });
+
+    it('should detect home-anchored OneDrive paths', async () => {
+      const { isCloudStoragePath } = await import('@/lib/sdk-options.js');
+      expect(isCloudStoragePath('/Users/test/OneDrive')).toBe(true);
+      expect(isCloudStoragePath('/Users/test/OneDrive/project')).toBe(true);
+    });
+
+    it('should return false for local paths', async () => {
+      const { isCloudStoragePath } = await import('@/lib/sdk-options.js');
+      expect(isCloudStoragePath('/Users/test/projects/myapp')).toBe(false);
+      expect(isCloudStoragePath('/home/user/code/project')).toBe(false);
+      expect(isCloudStoragePath('/var/www/app')).toBe(false);
+    });
+
+    it('should return false for relative paths not in cloud storage', async () => {
+      const { isCloudStoragePath } = await import('@/lib/sdk-options.js');
+      expect(isCloudStoragePath('./project')).toBe(false);
+      expect(isCloudStoragePath('../other-project')).toBe(false);
+    });
+
+    // Tests for false positive prevention - paths that contain cloud storage names but aren't cloud storage
+    it('should NOT flag paths that merely contain "dropbox" in the name', async () => {
+      const { isCloudStoragePath } = await import('@/lib/sdk-options.js');
+      // Projects with dropbox-like names
+      expect(isCloudStoragePath('/home/user/my-project-about-dropbox')).toBe(false);
+      expect(isCloudStoragePath('/Users/test/projects/dropbox-clone')).toBe(false);
+      expect(isCloudStoragePath('/Users/test/projects/Dropbox-backup-tool')).toBe(false);
+      // Dropbox folder that's NOT in the home directory
+      expect(isCloudStoragePath('/var/shared/Dropbox/project')).toBe(false);
+    });
+
+    it('should NOT flag paths that merely contain "Google Drive" in the name', async () => {
+      const { isCloudStoragePath } = await import('@/lib/sdk-options.js');
+      expect(isCloudStoragePath('/Users/test/projects/google-drive-api-client')).toBe(false);
+      expect(isCloudStoragePath('/home/user/Google Drive API Tests')).toBe(false);
+    });
+
+    it('should NOT flag paths that merely contain "OneDrive" in the name', async () => {
+      const { isCloudStoragePath } = await import('@/lib/sdk-options.js');
+      expect(isCloudStoragePath('/Users/test/projects/onedrive-sync-tool')).toBe(false);
+      expect(isCloudStoragePath('/home/user/OneDrive-migration-scripts')).toBe(false);
+    });
+
+    it('should handle different home directories correctly', async () => {
+      // Change the mocked home directory
+      homedirSpy.mockReturnValue('/home/linuxuser');
+      const { isCloudStoragePath } = await import('@/lib/sdk-options.js');
+
+      // Should detect Dropbox under the Linux home directory
+      expect(isCloudStoragePath('/home/linuxuser/Dropbox/project')).toBe(true);
+      // Should NOT detect Dropbox under the old home directory (since home changed)
+      expect(isCloudStoragePath('/Users/test/Dropbox/project')).toBe(false);
+    });
+  });
+
+  describe('checkSandboxCompatibility', () => {
+    it('should return enabled=false when user disables sandbox', async () => {
+      const { checkSandboxCompatibility } = await import('@/lib/sdk-options.js');
+      const result = checkSandboxCompatibility('/Users/test/project', false);
+      expect(result.enabled).toBe(false);
+      expect(result.disabledReason).toBe('user_setting');
+    });
+
+    it('should return enabled=false for cloud storage paths even when sandbox enabled', async () => {
+      const { checkSandboxCompatibility } = await import('@/lib/sdk-options.js');
+      const result = checkSandboxCompatibility(
+        '/Users/test/Library/CloudStorage/Dropbox-Personal/project',
+        true
+      );
+      expect(result.enabled).toBe(false);
+      expect(result.disabledReason).toBe('cloud_storage');
+      expect(result.message).toContain('cloud storage');
+    });
+
+    it('should return enabled=true for local paths when sandbox enabled', async () => {
+      const { checkSandboxCompatibility } = await import('@/lib/sdk-options.js');
+      const result = checkSandboxCompatibility('/Users/test/projects/myapp', true);
+      expect(result.enabled).toBe(true);
+      expect(result.disabledReason).toBeUndefined();
+    });
+
+    it('should return enabled=true when enableSandboxMode is undefined for local paths', async () => {
+      const { checkSandboxCompatibility } = await import('@/lib/sdk-options.js');
+      const result = checkSandboxCompatibility('/Users/test/project', undefined);
+      expect(result.enabled).toBe(true);
+      expect(result.disabledReason).toBeUndefined();
+    });
+
+    it('should return enabled=false for cloud storage paths when enableSandboxMode is undefined', async () => {
+      const { checkSandboxCompatibility } = await import('@/lib/sdk-options.js');
+      const result = checkSandboxCompatibility(
+        '/Users/test/Library/CloudStorage/Dropbox-Personal/project',
+        undefined
+      );
+      expect(result.enabled).toBe(false);
+      expect(result.disabledReason).toBe('cloud_storage');
+    });
   });
 
   describe('TOOL_PRESETS', () => {
@@ -224,13 +370,27 @@ describe('sdk-options.ts', () => {
       expect(options.sandbox).toBeUndefined();
     });
 
-    it('should not set sandbox when enableSandboxMode is not provided', async () => {
+    it('should enable sandbox by default when enableSandboxMode is not provided', async () => {
       const { createChatOptions } = await import('@/lib/sdk-options.js');
 
       const options = createChatOptions({
         cwd: '/test/path',
       });
 
+      expect(options.sandbox).toEqual({
+        enabled: true,
+        autoAllowBashIfSandboxed: true,
+      });
+    });
+
+    it('should auto-disable sandbox for cloud storage paths', async () => {
+      const { createChatOptions } = await import('@/lib/sdk-options.js');
+
+      const options = createChatOptions({
+        cwd: '/Users/test/Library/CloudStorage/Dropbox-Personal/project',
+        enableSandboxMode: true,
+      });
+
       expect(options.sandbox).toBeUndefined();
     });
   });
@@ -285,13 +445,48 @@ describe('sdk-options.ts', () => {
       expect(options.sandbox).toBeUndefined();
     });
 
-    it('should not set sandbox when enableSandboxMode is not provided', async () => {
+    it('should enable sandbox by default when enableSandboxMode is not provided', async () => {
       const { createAutoModeOptions } = await import('@/lib/sdk-options.js');
 
       const options = createAutoModeOptions({
         cwd: '/test/path',
       });
 
+      expect(options.sandbox).toEqual({
+        enabled: true,
+        autoAllowBashIfSandboxed: true,
+      });
+    });
+
+    it('should auto-disable sandbox for cloud storage paths', async () => {
+      const { createAutoModeOptions } = await import('@/lib/sdk-options.js');
+
+      const options = createAutoModeOptions({
+        cwd: '/Users/test/Library/CloudStorage/Dropbox-Personal/project',
+        enableSandboxMode: true,
+      });
+
+      expect(options.sandbox).toBeUndefined();
+    });
+
+    it('should auto-disable sandbox for cloud storage paths even when enableSandboxMode is not provided', async () => {
+      const { createAutoModeOptions } = await import('@/lib/sdk-options.js');
+
+      const options = createAutoModeOptions({
+        cwd: '/Users/test/Library/CloudStorage/Dropbox-Personal/project',
+      });
+
+      expect(options.sandbox).toBeUndefined();
+    });
+
+    it('should auto-disable sandbox for iCloud paths', async () => {
+      const { createAutoModeOptions } = await import('@/lib/sdk-options.js');
+
+      const options = createAutoModeOptions({
+        cwd: '/Users/test/Library/Mobile Documents/com~apple~CloudDocs/project',
+        enableSandboxMode: true,
+      });
+
       expect(options.sandbox).toBeUndefined();
     });
   });