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I want to cap these wires with a wire nut so that I can stuff them back up in the ceiling and install a regular, battery-powered smoke alarm. What wires get capped and do I need to do anything with the ground wire seen up in the hole in the ceiling?

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Why not keep a mains-powered detector? The biggest benefit is the fact you have a 3-wire detector: that red wire is (well, should be) connected to all other detectors in your house: if one goes off, they'll all go off. Pretty much all mains-powered detectors have battery backups, and the battery will last much longer since it's not constantly being used. It's also a bit easier to find units that have both ionizing and photo detectors in the same unit, or also have carbon monoxide (CO) detection (important if you have a fireplace or any gas appliances/heaters). –  gregmac Jan 24 '12 at 3:29
    
@oscilatingcretin - Remember that more and more states and municipalities are requiring carbon monoxide detectors on almost every family dwelling. I'm all electric and am required to have a CO detector because I have an attached garage. gregmac is right on the ionizing and photo detectors also. DIY also means you can surpass code and give you and your family more protection than code and law requires. –  lqlarry Jan 24 '12 at 5:31

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All three wires get capped separately with wire nuts. You need to cap the neutral (white) wire because it can carry current from another part of the circuit. Wrapping the nut in electrical tape is a good idea too. They make nuts that are good for holding a single 12-gauge or 14-gauge wire (the ones I have are dark blue).

You don't need to do anything special with the ground wire, just be careful when you're pushing the other wires up into the box that you don't accidentally touch it to bare copper on one of the other wires.

Also remember that electrical junctions have to be accessible. In your case, this would probably mean covering the hole in the ceiling with a blank face plate and installing the battery-powered detector somewhere else: I don't think you can use the base plate for the new detector as the cover. I would also be concerned about drafts through that hole reducing the effectiveness of the detector.

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Hint: Cut off any exposed copper wire and install an orange wire nut over the individual wires.(reduces risk of bare copper touching box or other wires) Secure the wire nut with some electrical tape and fold them into the j-box. –  shirlock homes Jan 24 '12 at 10:40

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