They did it this way: from the powerplant, it was hot steam under pressure, not even water, that got to the block-sized heat exchanger (serving maybe 500-1000 people, 200-300 flats - one large soviet-style block or 2-3 smaller ones). There, heat exchanger warmed the technical (indeed totally non-potable, almost poisonous, and constantly circulating) water for the heaters, that was only there during the heating season, and separately, tap water, these were two completely different, non-mixing circuits (and both of them short without much insulation - maybe around 100 meters each way outside, plus within the buildings). And sure the tap water wasn't potable, but it had nothing to do with the way it was heated - there were two completely different circuits for hot and cold water anyway, cold water never entered the heat exchanger building. It was always a separate building by the way, i think because a potential accident with high pressure steam could kill a lot of people if it happened right within the residential building itself.
We were told that hot tap water was totally dangerous to drink and no one tried to. Cold water was unsafe to drink but some people either had reverse osmosis filters, which i know aren't good because they deprive water of a lot of useful stuff too, but no one knew it back then, or they boiled it, but most just drank it as it was. Shorter lifespans and much lower average age, and plenty of other life dangers like mass alcoholism, made water quality was a lot less important than it is today in the West - it won't be water that kills you anyway, it's vodka, lifestyle, of the Party itself.