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I am pushing my basement finishing project off for a couple of years, so I will not be moving the water heater in the near future. Is this corrosion bad enough that I need to have it repaired before I end up with a flood?

UPDATE:

I cleaned up the joint with a metal brush. It looks like the buildup of rust and scale has actually sealed the joint up. Here are photos. I am not sure if I should just let it be now. I am scared that if I take the joint apart, the nipple will be damaged.

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    I once installed a water heater this way since it was recommended by the local plumbing inspector, but recommendations have changed. The standard procedure now is to use flexible connecting hoses which have electrically insulating bushings. This stops corrosion due to dissimilar metals being in contact in the presence of water (steel of water heater and copper distribution piping). My water heater did not last as long as it should have. I don't know which kind of flexible connecting lines are best. – Jim Stewart Jun 19 '17 at 15:28
  • The nipples appear to be dielectric nipples, so I would suspect that the corrosion is from a leaking joint – d.george Jun 19 '17 at 15:35
  • Those nipples look to me like the thermally insulating ones. i.e., with plastic liner inside, but looks like a conducting connection at the threads so these would not be a "dielectic" connection, i.e., not an electrically insulating connection. It would be easy to test with a VOM in the resistance mode. – Jim Stewart Jun 19 '17 at 18:34
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Yes, I would replace that right away. I wouldn't touch it without the proper replacement parts on hand, since you don't know the depth of the corrosion.

Agreeing with other answers, you need a dielectric between the tank and the copper. Although they claim to be dielectric nipples (T-575 is apparently a dielectric nipple, and I think that's what the label says) I don't see how that is possible as it's directly connecting the copper to the steel.

The corrosion on the steel may also be indicative of the condition of the inside of the tank.

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It looks like water is condensing on the cold inlet pipe under the right conditions. The copper is more corrosion resistant than the galvanized steel to these conditions . I would clean it with a wire brush and see how much damage there is , worst case you need to replace the heater if the steel nipple is bad . Wrap/insulate the cold inlet to reduce condensation. Or , more difficult , rearrange the piping to put a elbow at the top of the heater so condensate will not run down the pipe.

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    I suspect there might also be a problem with, or lack of, a dielectric coupling here. – Ecnerwal Jun 19 '17 at 15:26

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