Treat the water heater as an asset and enter it in the assets/depreciation section. Note that water heaters are somewhat of a grey area. Technically, it's an appliance. But it's not like a stove that you can take out of the house by simply unplugging it.
A water heater becomes "a physical part of" the plumbing system, which is already "a physical part of" the structure. So with that analogy it gets classified as residential rental real estate and depreciated over 27.5 years. Since it's somewhat of a grey area, I prefer to play it safe and treat it as residential rental real estate.
Another thing you can do also, is just expense the cost of the water heater under safe harbor di-minimis if the cost is less than $2,500. Most likely it is. I know the last time I had to purchase a new water heater for one of my rentals a few years back, total cost including labor was around $800. Depreciating $800 over 27.5 years doesn't make one single penny of difference in my tax liability either. So I opted to expense it under safe harbor. Of course, doing that doesn't allow me to add to the cost basis of the property. But for $800, why bother?
