I'd go for number 2.

I agree , I like the way it's done in the picture .

Another vote for the way it's shown in the picture.
The flooring you have looks great, curious why you're changing it.

Not sure if that is your doorway in the picture but if it is, it looks good finished off that way. My doorway is framed and the tile is only brought partway through the doorway.
Here is how it looks:

All - thank you for the feedback. I do like #2 as well, just wasn't sure if there was a right or wrong way to do it.

Island - that's not my bathroom. If it were, I wouldn't be removing it either! :) It's my friends bathroom and I think it's lovely as well. I am doing Carrera too, but the lot I got is a bit more subtle ... not sure that I am happy about it, but it's the luck of the draw. I'm getting it at an outlet for pretty inexpensive so I'm trying not to be too picky about it.

Badgergal - Thank you for the picture. It's always helpful to see what others have done.

I'll post some pics when it's done. It's part of an inexpensive somewhat temporary makeover until I can afford to make more significant changes - like replacing the vanity and replacing the tub/shower combo with just a shower.

I still need to decide on the grout color - something white of course, but thinking that bright white may be too white. Also need to settle on whether I want it set straight or at a diagonal. I'd prefer diagonal, but trying to save on costs and I think it will cost more both from a labor and material perspective to do it on a diagonal.