Can the proceeds from the relinquished property be used to make improvements to the replacement property?

Yes. This is known as a Build-to-Suit or Construction or Improvement Exchange. It is similar in concept to a 1031 reverse exchange. The taxpayer is not permitted to build on property they already own. Therefore, a Special Purpose Entity (SPE) must take title to the replacement property, make the improvements, and convey title to the taxpayer before the end of the exchange period. See Case Study 3.