The lifespan of water heaters is 10 to 15 years. Your synopsis is probably correct and there is no easy solution other than a replacement.
The tankless heater will run you a couple of hundred dollars more than a conventional, however, the payback will occur in 3 to 5 years since you will not be wasting energy by constantly reheating the water when it is not used. The only drawback is that you cannot get a full flow of hot water by running more that two hot water faucets at the same time. This is a minor inconvenience since it seldom or ever happens.

There is an additional draw back on tankless
water heater. Since I was about to put one
in replace my water heater. However an issue
turned up with the flue. I was planning
on using the existing flue with the furnance.

Flue is 5 inches going up in the middle of
the house. Both tankless and furnance will
go around 240K BTU. The flue will NOT be able
handle it. So now I still investigating on
the work around. One option is to replace
the furnance with a 92% eff. which uses the
PVC then the flue will be free up for the
tankless.

stevo

They do make a tankless that direct vents though the wall, that is the one I am looking at for my 2- mstory house.

I can’t say much about tankless heaters, but there is one possibility on the problem you are experiencing with your current heater. It has happened several times with me.

Inside your tank is a long tube that connects to your cold water inlet, and channels that cold water to the bottom of your tank. This is so the cold water, coming in to replace the used hot water, doesn’t just get ****ed back up the hot water supply.

Well, when this tube gets rusty, it develops holes in it or gets fractured, and the cold water doesn’t reach the bottom of the tank, but rather, somewhere in their middle. Suddenly, you’re running out of hot water even though the heater doesn’t seem to be running much, and it doesn’t happen slowly, like you’re running out of water in a normal tank. You go from hot to cold real quick. Now those tubes can be replaced on some models. It happened to me twice, and in one instance I was able to change the tube, and in the other I was not. You can tell by looking at the top of the tank, and if you see a threaded flange bigger than the tube, you probably can. It’s a standard length of galvanized pipe.

Another possibility is if your tank is electric. At 40 gallons, I doubt it is, but if so, one of your heating elements may be out. Essentially, you’re heating only half the tank. Parts for this situation can be bought at most hardware stores.

There are some other possibilities for gas heaters, but they are remote, and possibly expensive to repair. Keep in mind on any repair that your current unit is 10 years old, and may not be worth any time, money, or energy to repair. Consider, if you go conventional replacement, to upgrade to at least 50 gallons if you have an electric unit.