Consult you AHJ. Technically, you are not in the bathroom if you are in a closet, but the AHJ may consider that area coantains "easily ignitable materials" or they may consider it still in the bathroom.
it is the safest way I can think to do it water-heater requires three two pole 40's breakers are now going to be within sight and reach of water-heater not clear across house in garage 80 foot away as the conduit runs
three disconects for one water-heater did not seem a very safe install the breakers will now be the means of disconect so all power to water-heater can now be turnrd off with one breaker or part of power can be turned off by each two pole 40.
combustable material in a water-heater closet is not a concern but the fact that the closet is in the bathroom is. It is a GREY area I was unsure of and just want some oppinions
When you first said closet - I was thinking CLOTHES closet. I would call that a mechanical closet. I don't see a problem, if it has enough clearance. But, it's still up to your AHJ.
As long as you meet the work clearance its good to go.It is not a bathroom any more so than a closet in a bedroom is a bedroom.What would be at question is the likelyhood of it becoming storage.That is hard one to deal with,but legal as long as no shelfs in work space 30x36