When you sell the property, your gain will be the amount you received less your cost basis (the amount you paid for it). The cost of any improvement you do is added to the basis, so your gain will be lower.
Cost basis is the original purchase cost of an asset (such as stocks, bonds, or property), plus any adjustments that result from transactions over the period you own the asset. Examples of adjustments would be an increase in valuation due to a property improvement or a decrease in valuation due to unreimbursed storm damage to the property.
When you sell the asset, your cost basis gets subtracted from the money you collect from the sale. Instead of paying tax on the full amount, you only get taxed on the profit (the selling price minus the cost basis).
How do I handle capital improvements and depreciation for my rental?
Can I deduct home improvements on my tax return?
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