Water heater cented DIRECTLY into wood fireplace chimney; HAVE PICS

I apologize for the lengh of thi, I'm just trying to explain as much as possible.
Okay, so the house was built in 1929. I'm not sure if this is the ORIGINAL configuration, but it's been this way since at LEAST '94.
I don't know all the terminology here, so you'll have to forgive my ignorance:
We have a chimney with 3 separate holes up to the top; 1 is the fireplace on the 1st floor (not part of the issue here), 1 is the furnace, and 1 is the downstairs (basement) fireplace. The furnace has a stovepipe-type pipe that goes from the top (the outside protuberance at the top of the chimney) down through the actual brick enclosure, and then comes out the side of the brick enclosure in the basement to connect to the pipe coming out of the furnace. Here is a view of the fireplace and furnace; you can see the steps on the other side of the furnace:
http://www.grilloff.com/_images/FireAndFurnaceFront.jpg
In the next pic, you can see the downstairs fireplace, and on the right is the venting pipe of the furnace (it's just getting a little closer so you can see the furnace pipe going into the chimney column better):
http://www.grilloff.com/_images/FireFurnaceSide.jpg
The downstairs fireplace is, I believe, the normal configuration, just the hole going up through the fireplace flue all the way to the outside. The water heater, which is on the other side of the big chimney column from the fireplace, has a pipe going through the wall of the chimney column, and I can actually see the opening of it up in the chimney; it's just a pipe that opens into the fireplace's chimney.
Here's a picture of the big chimney column on the furnace side; you can't see the fireplace, but it is on the left chimney wall behind the furnace. The water heater is on the right (you can see it and its pipe behind the stairs):
http://www.grilloff.com/_images/FurnaceHeaterFront.jpg
So, walking to the right and going past the stairs, you see this:
http://www.grilloff.com/_images/HeaterFront.jpg
See the water heater's vent going itno the chimney? The other side of the pipe just terminates up inside the fireplace's chimney; you can open the fireplace flue and shine a flashlight up there and see the pipe just ending.
And continuing past the water heater and then looking back at it, you see this (the chimney wall that continues to the right is the opposite side of the chimney column from the furnace; around the corner and to the left is the fireplace):
http://www.grilloff.com/_images/HeaterSide.jpg
Now, we tried to have a nice fire downstairs once, but smoke actually started coming out of the water heater's vent right on top of the water heater. Not a crapload of smoke, I mean there must have still been SOME upward movement of the air to the top of the chimney and outside, but it was enough to actually see it (and of course smell it) coming out and fogging up the basement. And, of course, I'm sure it's not "up to code" to have the water heater just venting directly into the shared fireplace chimney.
So here are my questions, and I hope someone can help me:
1) How can we vent this water heater the right way, with its own compartment or something, such that we don't have to move the water heater? I hypothesized to a chimney sweeper (expertise not so great, it seemed, but of course I know much less) that perhaps we could just connect a long stovepipe-type deal to the water heate'rs vent inside the same shared fireplace chimney, thus sort of faking a separate chimney, even though it's really just a pipe going up the firepace's chimney. He said that the chimney hole for the fireplace was probably too narrow to do that, and it would constrict the opening too much, such that the smoke wouldn't have enough room to go up, and it would probably be coming out the fireplace due to insufficient air flow straight up. Plus, I was worried about the heat on the pipe, and of course sweeping the fireplace chimneny would probably be difficult to impossible. The sweeper said he's seen configurations where the pipe coming out to connect to the furnace vent is a "Y," and the water heater would connect into it, and so the water heater and the furnace would share the pipe. However, you can see from the configuration here that we can't run the water heater vent pipe to where the furnace vent pipe is; it would have to go around the stairs, and would surely not be an upward angle, either. In fact, it would actually have to go downhill, so that's out. Any ideas here?
2) If we DO have to move the water heater (a serious pain, because we'd have to completely change the gas lines and the copper pipe of the water intake and output), the water heater is taller than where the current furnace vent goes into the chimney; so how could we arrange that? Are we talking about knoecking a high-up hole in the chimney and re-piping everything, and sealing up the old hole? Is there anything less drastic we could do?
3) I've heard of these "ventless" water heaters that need no venting into the outside, they just sit in the basement and are safe somehow. However, we JUST bought this water heater, and the ventless ones are hugely expensive. I'd like to try and resolve this issue a different way.
Sorry about the place being a mess in the pics, and I would REALLY appreciate any advice on this.
Thanks very much for reading, and in advance for any input.
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CompleteNewb wrote:

Replace it. You could get a "Low Boy" model that could TEE into the existing vent (and move the heater).
You could replace it with a "Power Vent" model that exhausts out the side wall, but at greater expense.
Jim
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Speedy Jim wrote:

<SNIP>
A couple more notes: Although having a furnace and water heater share a single flue is widely accepted, the final word is up to your local inspector.
A little troubling is that the fireplace may rob the appliances of combustion air when the fireplace is in use. There could be a need for an outside combustion air source.
Jim
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Get an electric water heater.
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I appreciate the responses, but we just purchased the water heater seen in the pics like a month ago. The one that was there before had been there since '94, and the dip tube was disintigrating and clogging our faucets with little plastic pieces. It's because of that recent purchase that I'm trying to figure out how to resolve this without buying ANOTHER new water heater.
Thanks again.

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Newbie Supreme wrote:

OK.
Last ditch possibility: http://www.fieldcontrols.com/venting.php
This is an add-on power venting device. No chimney; vents thru outside wall. Uses existing water heater.
Downside- may not be cheaper than a new heater.
----- Alternate: If you could move the existing heater to the furnace area, why not punch a new hole into the chimney used by the furnace, but higher up?
No matter what you do, there is going to be *some* significant expense. It's a real tossup.
Jim
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Newbee, Any changover to the chimney would be questionable at best to the inspector. Even now it is a questionable setup considering the sharring of chimneys. Im afaid I would recommend the ventless or electric water heater. Maybe your installer of the last one can cut you a deal for a tradein since your recent water heater is so new.
PS. on the smoke exchange between chimneys and vents this would work to seal the fireplace chimney airtight downstairs http://www.chimneyballoon.us
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