A water heater including a thermal break in the form of an air pocket that moves into an air trap segment of the cold water pipe to reduce heat loss during standby. The air pocket is pushed back into the tank by incoming cold water during a hot water and reforms at the top of the tank. During standby, the air pocket moves into the air trap via an anti-siphon hole communicating with the cold water inlet. The anti-siphon hole can be, for example, in the top of the dip tube.