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.