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1) Yes, you are correct. The National Electrical Code (NEC) does not allow any electrical panels to be installed in a closet or bathroom area due to potential safety and fire hazards. This requirement is mandatory in all states of the United States. Reference Article 240.24D & E in the 2011 edition of the NEC. This has been a requirement of the NEC for numerous years.
1A) Article 100 - (2011 NEC) - Clothes Closet definition: A non-habitable room or space intended primarily for storage of garments and apparel.
2) Per the 2011 NEC, 3 feet clearance must be provided and maintained in front of all panels operating at 120/240 volts.
3) At least 6' 6" of clear headroom must be provided and maintained.
4) A clear space of 30" wide (or the width of the panel - whichever is greater) must be maintained. Panel doors must be able to open at least 90 degrees.
5) The solution to renovating around an existing electrical panel is to preferably relocate the panel into a basement, mud room, utility room or attached garage. These are the most common locations for all electrical panels within a single family dwelling. If relocation is not an option, then the area where the electrical panel currently exists must no longer be used as a closet space due to potential fire hazards with clothes storage.
6) Another possible option if not able to relocate the panel is to frame around it while maintaining the aforementioned clearances and designate the newly framed area as an electrical room.
7) You also need to consider if leaving the panel installed in an existing closet and if you ever put the house up for sale, it is very likely that any potential home buyer will hire a state licensed home inspector. If the home is inspected by a licensed home inspector, I can guarantee that this will be written up as an electrical code violation and it will not be in your favor. The potential home buyer will use the closet electrical panel as a means to low-ball the asking price on the home.
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