96 bmw 325i its overheating and blowing white smoke and dipping water out the exhaust. took off the off the valve cover and discovered water in the oil.

What color is the smoke? White or Blue?
If it's more white than blue you probably have a bad head gasket or a warped / cracked head. The smoke you're seeing is coolant seeping into a combustion chamber. Major job.

If it's more blue/grey you might have rings that are shot, or a piston that has a hole in it.

Either way, it really doesn't have much to do with that valve cover gasket; that gasket will just make it leak oil. If it get's on the exhaust it will smoke, but not out the tailpipe.

Do fans come on , if not it is the $8 dollar temp sensor or the fan fuse or the fan motor.
If you have heat from the heater and if radiator gets hot then it is neither the raditor or the water pump nor the thermostat as neither heater or radiator would get hot
because no water would be moving in the system.
So

White smoke out of the exhaust indicates moisture (water) in the exhaust. If the car is not driven very far each day, some moisture will collect in the muffler and cause white smoke for a short while after starting. If the smoke is continual, however, you need to watch you coolant level as you may have a blown head gasket.

White smoke on start up can be lots of raw fuel

White Smoke any other time is a failed Head Gasket
& major repair

Check to see if your coolant goes down in the plastic
container overnight

white were? the exhaust tip, or other spot, long pipe, name spot?
white, is steam or OIL.
oil smells like burnt oil and takes for ever to dispate
steam is water, and smells , sweet due to 50% glycol inside.
and goes away fast.
but all Gas engines make water at all the time running as a by product of combustion and for sure on cold days, some times full time cold
due to climate effects.
does your neighbors car smoke at same time, (look)
bingo , dew point.

all gas engine smoke cold started, (steam)

so first find out what it is,
take the dip stick out of a hot engine. stalled, drip it on the exhaust
see that smoke ,smell it? that is burning oil
now you know what you have, steam or oil. smoke.

You have worn engine valve guides and seals.

White smoke means water on exhaust or gasket broken; check coolant levels ok. or re adjuts gasket.

Has the car overheated recently or in the past? If you are seeing white smoke from the exhuast you may have a cracked cylinder head or blown head gasket. If you are seeing white smoke from the exhaust, check the oil for signs of coolant (milky brown oil color or any foamy white on the dipstick) Also check you coolant level to see if it is lower than normal. If the smoke you are seeing is black you should also check you oil level. (could be a burned valve).

Ekun,
What you're describing is a blown head gasket or a cracked head. What's happening is the gasket or head is letting coolant get into the combustion chambers of the engine, producing your white smoke, and accounting for your coolant loss. You need to take it in to get checked out; often times if the head warped or something, it will need to be machined. This is something that's urgent; you can ruin your engine quickly running it this way. For future reference for you, here's the different smokes you will see and what causes them. White smoke-coolant in the combustion chambers, caused by leak in head or head gasket. Blue smoke-oil in combustion chambers, can be caused by worn, broken, or weakened piston rings, faulty PCV valve, worn valve guides. Black smoke-engine running too rich, and unburned fuel is escaping. I hope you get it fixed soon, those 3-series are great cars....mine's been awesome.