diff --git a/.gitignore b/.gitignore
index af4080c..98e2308 100644
--- a/.gitignore
+++ b/.gitignore
@@ -3,3 +3,4 @@ node_modules
 package-lock.json
 *.vsix
 .vscode/settings.json
+.env
diff --git a/src/extension.ts b/src/extension.ts
index a9a945e..95c8bb7 100644
--- a/src/extension.ts
+++ b/src/extension.ts
@@ -5,9 +5,12 @@ import * as vscode from "vscode";
 import {Configuration} from "./configuration";
 import {logger} from "./logger";
 import {ExtensionData} from "./extensionData";
+import {addDevEnvVariables} from "./utils";
 
-const extensionData = new ExtensionData();
 logger.setupOutputChannel();
+addDevEnvVariables();
+
+const extensionData = new ExtensionData();
 let configuration = new Configuration();
 
 const disposables: vscode.Disposable[] = [];
diff --git a/src/extensionData.ts b/src/extensionData.ts
index c9db9c4..6a37b5e 100644
--- a/src/extensionData.ts
+++ b/src/extensionData.ts
@@ -94,11 +94,20 @@ export class ExtensionData {
 	 * Set the extension discovery paths into the extensionDiscoveryPaths Map.
 	 */
 	private setExtensionDiscoveryPaths() {
+		// Get the DEV_USER_EXTENSIONS_PATH env variable if it exists.
+		const devUserExtensionsPath = process.env.DEV_USER_EXTENSIONS_PATH;
+
 		// The path to the user extensions.
 		//
 		// On Windows/Linux/Mac: ~/.vscode[-server|remote]/extensions
 		// On WSL: ~/.vscode-[server|remote]/extensions
-		const userExtensionsPath = isWsl ? path.join(vscode.env.appRoot, "../../", "extensions") : path.join(this.extensionPath, "../");
+		//
+		// Because the extensionPath is created from __dirname and retrieves where this extension
+		// is located, in extension testing/development mode, this path will point to the local
+		// development path, not the actual user extensions path. So we use the custom
+		// DEV_USER_EXTENSIONS_PATH env variable to override it.
+		const userExtensionsPath =
+			devUserExtensionsPath || (isWsl ? path.join(vscode.env.appRoot, "../../", "extensions") : path.join(this.extensionPath, "../"));
 
 		this.extensionDiscoveryPaths.set("userExtensionsPath", userExtensionsPath);
 		// The path to the built-in extensions.
diff --git a/src/utils.ts b/src/utils.ts
index d1388ac..5d6fe71 100644
--- a/src/utils.ts
+++ b/src/utils.ts
@@ -1,4 +1,5 @@
 import * as fs from "node:fs";
+import * as path from "node:path";
 import * as jsonc from "jsonc-parser";
 import {logger} from "./logger";
 import {window} from "vscode";
@@ -237,3 +238,75 @@ export function mergeArraysBy<T>(primaryArray: T[], secondaryArray: T[], key: ke
 
 	return merged;
 }
+
+/**
+ * Add development environment variables from a local .env file located in the project root.
+ */
+export function addDevEnvVariables() {
+	// Try to load the local .env file from the project root.
+	try {
+		process.loadEnvFile(path.join(__dirname, "../../.env"));
+	} catch (error) {
+		// Ignore errors if the .env file doesn't exist
+	}
+
+	// Validate the loaded environment variables
+	validateDevEnvVariables();
+}
+
+/**
+ * Validate and sanitize the `DEV_USER_EXTENSIONS_PATH` environment variable.
+ * Removes invalid paths from the environment with logged errors.
+ */
+function validateDevEnvVariables() {
+	// Validate DEV_USER_EXTENSIONS_PATH if it was loaded
+	if (process.env.DEV_USER_EXTENSIONS_PATH) {
+		// Trim whitespace and resolve the path to an absolute path
+		let devPath = path.resolve(process.env.DEV_USER_EXTENSIONS_PATH.trim());
+
+		let stats: fs.Stats;
+		let errorMsg: string = "";
+		let errorData: Error;
+
+		// Get the file system stats for the path to check if it exists.
+		// statSync throws an exception if the no file system data exists for the path,
+		// so we catch it to handle errors gracefully.
+		try {
+			stats = fs.statSync(devPath);
+		} catch (error) {
+			const nodeError = error as NodeJS.ErrnoException;
+			const errorCode = nodeError.code || "UNKNOWN";
+
+			// Handle specific file system errors with user-friendly messages.
+			const errorMessages = {
+				ENOENT: "Path from env variable 'DEV_USER_EXTENSIONS_PATH' does not exist",
+				EACCES: "Permission denied accessing path from env variable 'DEV_USER_EXTENSIONS_PATH'",
+				UNKNOWN: "Unknown error accessing the path from env variable 'DEV_USER_EXTENSIONS_PATH'",
+			};
+
+			errorMsg = `${errorCode}: ${errorMessages[errorCode]}: "${devPath}". Removing from environment.`;
+
+			errorData = error as Error;
+
+			delete process.env.DEV_USER_EXTENSIONS_PATH;
+		}
+
+		// If stats has data AND the path is NOT a directory
+		if (stats && !stats.isDirectory()) {
+			errorMsg = `DEV_USER_EXTENSIONS_PATH is not a directory: "${devPath}". Removing from environment.`;
+		}
+
+		// If there was an error...
+		if (errorMsg.length > 0) {
+			// Delete the environment variable to prevent issues later on and log the error.
+			delete process.env.DEV_USER_EXTENSIONS_PATH;
+			logger.error(errorMsg, errorData);
+		}
+		// Otherwise, if there are no errors...
+		else {
+			// Update the environment variable with the sanitized path and log a success message.
+			process.env.DEV_USER_EXTENSIONS_PATH = devPath;
+			logger.info(`Loaded DEV_USER_EXTENSIONS_PATH: "${devPath}"`);
+		}
+	}
+}