@Carl wrote:
When you expense a qualified item under safe harbor, it's not treated as an asset and therefore is not depreciated. Additionally, the cost of the item can not be added to the cost basis either.
Now a water heater falls in a somewhat grey area. As I see it, a water heater does not qualify for safe harbor or for SEC179 or SDA. Since a water heater becomes a physical part of the plumbing system, which itself is a physical part of the structure, it gets classified as residential rental real estate and depreciated over 27.5 years.
There are others who will disagree with my assessment/interpretation, and they most certainly can do so.
There are two safe harbors that we might be mixing up. There is a safe harbor of $2500 for tangible property, I don't think that applies.
However there is also a separate "safe harbor for small taxpayers" which includes improvements to residential real estate. Plumbing is specifically included. The taxpayer must own less than $10M of real estate to qualify and the safe harbor limit is $10,000 or 2% of the cost basis, whichever is less. (h)(7) specifies that items with this election are not treated as improvements for tax purposes.
https://www.law.cornell.edu/cfr/text/26/1.263(a)-3
https://www.nolo.com/legal-encyclopedia/small-taxpayer-safe-harbor-for-repairs-improvements.html
