Not a tax expert. Just a yahoo with rental property.
The way I look at it...will you still be depreciating it when it needs to be replaced again? If so, then I write it off as an expense (repair) that year. If not, then its an improvement amortized over 27.5 years.
In your case, the water heater will last 6-12 years normally...so you would still be depreciating it when you replace it again, if you don't write it off as a repair.
