Should I deduct or capitalize the cost to replace a water heater in my rental property? (details Below)
If you're repairing an existing appliance - its an expense. If you're replacing an existing appliance with a new one - that's disposing of one capital asset and putting in service another. You depreciate the new one and you dispose of the old one (if not fully depreciated - talk to your tax adviser how to handle the remaining value). The additional costs of the fixes that are not related to the installation of the new appliance are regular maintenance expenses, so you have to get an itemized invoice from the plumber to know what to expense and what to capitalize. Pub 527 my friend.  It gets depreciated. Table 1-1 on page 5. You may be able to choose.  As a small business, you can expense certain depreciable assets (section 179).  But by choosing to depreciate the asset, you are also increasing the cost-basis of the property.  Are you planning to sell the property in the next couple of years?  Do you need a higher basis? Section 179 - Election to expense certain depreciable business assets
I'd recommend you use an online tax calculator to see the effect it will have. To your comment with @littleadv, there's FMV, agreed, but there's also a rate below that. One that's a bit lower than FMV, but it's a discount for a tenant who will handle certain things on their own. I had an arm's length tenant, who was below FMV, I literally never met him. But, our agreement through a realtor, was that for any repairs, I was not required to arrange or meet repairmen. FMV is not a fixed number, but a bit of a range.  If this is your first rental, you need to be aware of the requirement to take depreciation. Simply put, you separate your cost into land and house. The house value gets depreciated by 1/27.5 (i.e. you divide the value by 27.5 and that's taken as depreciation each year. You may break even on cash flow, the rent paying the mortgage, property tax, etc, but the depreciation might still produce a loss. This isn't optional. It flows to your tax return, and is limited to $25K/yr. Further, if your adjusted gross income  is over $100K, the allowed loss is phased out over the next $50K of income. i.e. each $1000 of AGI reduces the allowed loss by $500. The losses you can't take are carried forward, until you use them to offset profit each year, or sell the property.  If you offer numbers, you'll get a more detailed answer, but this is the general overview. In general, if you are paying tax, you are doing well, running a profit even after depreciation. "I have bought and sold 18 homes. Yes it sounds like a lot some were flips, some turned to rentals and we have moved many many times. I have had home warranties when the seller offered them. In my experience the warranty company does as little as possible.  For example, hot water heaters; you call the warranty company because the hot water heater is making ticking noises, and its running the gas all the time and you still can't take a 5 minute shower with out running out of hot water. These are all signs that the water heater is full of slide and its gong to blow and flood where ever it happens to be. Will you get a new hot water heater? No, you will pay the $75 for the service call the warranty company will not replace it because ""it still works"". Now after it has flooded you basement or garage, front hall or where ever then they will replace it but not pay for any damage that has occurred.  Same for other things. You can pay that service fee over and over for some slap stick repair that after all the fees and hassle of missing work to wait on the repair person well it would have been cheaper to just pay for a replacement." GET A LAWYER. Doing business with relatives is business first, and some effort spent in setting things up and nailing down exactly what the financial relationships and obligations are beforehand can save a lot of agony and animosity later. Assuming it's a legal rental, you may be able to deduct business costs spent on maintaining the rental unit, but of course you will have to declare the rent as income. If it's just a bedroom suite, rather than a full legal apartment, I don't think you can claim it as rental. (Note that whether you decide to share cooking and such is a separate question; apartment in most areas requires its own kitchen and bathroom.) As Joe pointed out, the actual purchase also sounds like it's going to involve a large gift, which has its own tax implications. Either that, or they retain ownership of their share and you get to deal with that if you or they decide to sell.  Again: GET A LAWYER. And a tax accountant or tax lawyer to advise you on those implications. This is not someplace where the average wisdom of the Internet should be relied upon except for generalities; local laws and contract details matter. "The biggest question is do you want to be a landlord? There are a lot of ups and down to managing property from bad tenants to having to fix a water heater or replace a fridge.   If you aren't interested in being a landlord, it is definitely a bad idea.   If you do want to be a landlord, then the question is how close do you want to be to your tenants?   What if they are up late making noise, etc.?   What if they watch TV all night and you hear it through the walls?   What is your plan?   You ask if people have trouble ""sharing"" a house.   If you are the landlord and the other party the tenant, then you aren't ""Sharing"", you are leasing.   It's a different relationship with different strains." $900 seems like a fair cost of minor repair. As a landlord, I repaint and repatch the walls if there are any holes. Labor is also expensive now a days (especially here in the West Coast).   HOWEVER, this is why there is a security deposit. To make sure things like this is covered after move out. NOW, you could ask the landlord for an itemized invoice of the cost of repairs. Which then you could rationalize the costs of repairs. I usually take the security deposit, then deduct any costs that were need during repair. And give the remaining difference back to the tenant. I'm afraid your best recourse may be legal. I don't know that internet is a necessity, but the court would frown upon anyone paying $4K for rent but not being able to afford to heat the water or turn the lights on. $48K a year net should be enough for her to at least keep the kids with these things.  I don't know that you can educate her. Her issue is very deep-seated and far beyond a good financial planning type session. "I'd say your tenant is out $750, not you. How you handle it is totally personal preference.  If you want to be the super-nice landlord and eat the loss this one time, then you might gain some karma and hopefully they'll be awesome tenants for the remainder of their stay. Are they the kind of tenants you want to be nice to because they deserve it?  You (and she) have no way to prove she ever actually tried to pay you. Sound like she is learning a $750 lesson. ""Don't leave cash in a mailbox, and always get a receipt for rent paid."" Your insurance company would likely not pay out as it'd be below a typical deductible and you can't really prove the money ever existed. You'd be better off just taking the loss.  Think about it this way: How would you expect a bank or utility company to respond to this situation? ""Yeah, I left my mortgage as a cash-filled envelope on your doorstep. You didn't get it? I told you I'd do it!"" Guess who's paying double mortgage and a late fee?  You're not stuck with option 1, you're choosing to do it. She could refuse and fight you on it, which might not be worth the headache and potential small-claims court. But you're entitled to receive the rent and she is obligated to pay it. And ""paying it"" means making sure you actually receive it." It's the same result either way.  Say the bills are $600, and you are reimbursed $400. You'd be able to write off $400 as part of the utilities that are common expenses, but then claim the $400 as income.  I'd stick with that, and have contemporaneous records supporting all cash flow. You also can take 2/3 of any other maintenance costs that most homeowners can't. Like snow removal, lawn care, etc.