The HVAC is a capital improvement that has to be depreciated over time. No question about that.
The water heater is another matter, as the IRS rules are rather "grey" on this. They insinuate one thing in one publication, and just the opposite in another.
While the WH is less than $2,500 and does qualify to be expensed, it also becomes "a permanent part of" the structure and also maintains the value of the property. (I don't see it adding value; just maintaining value.)
In my opinion (and we all know what opinions are like) I would capitalize/depreciate it. However, as a replacement for a bad and/or non-functioning water heater, the option to just expense it is there also since it really causes no change in the property's value. Me personally, I'd just expense it and be done with it. But if asked this same question tomorrow, I may feel completely different and suggest the opposite.
