What you are describing is a leak down issue. The bucket leaks down all the way but the loader arms only leak down halfway.
The two things that can cause this that I know of are internal cylinder leakage (from one side of the piston to the other) or an internal leak in the control valve where fluid is leaking past a part that is supposed to be blocking it.
Unless fluid is leaking out of the quick connects, I can not see how they could be involved at all, water or not. Most hydraulic fluids contain emulsifiers that hold water in suspension of the fluid so that it will not pool up in the bottom of the tank or freeze solid. If you have water in the fluid it will most likely have a milky appearance to it.
That raises the question of what fluid are you using?
Also, why was the one cylinder rebuilt and what was done to it?
If you raise the loader all the way up and push the joystick into "float" how does it behave? Does it come down gently or slam like it has been dropped?
Did this issue start immediately after re-installing the repaired cylinder or did it work fine for a while before this started happening?
Does it leak down at the same rate with the engine off as it does with the engine running? (not sure why this would matter but it might be a clue)