Convert first home to rental property

[Matthew Trotter]

I have a question where I'm not sure of the legality. Looking for your helpful advice.

Here is the plan: I purchase my first home for $100k. I use $10k from my Roth IRA as part of a $25k downpayment as a first-time home buyer. I pay the other $15k of the downpayment from my savings. My lender is a private lender and not a conventional bank. I live in the home for a couple of years. So far, everything is legal and fine.

Here is where I'm concerned about the legality: Next, I buy a 2nd home as an owner-occupant and move into it. I rent out the 1st home while continuing to pay the monthly principal+interest payments to the private lender. I'm making positive cash flow, and things look good for me. I don't change ownership of the 1st home to an LLC, but I do get extra liability insurance. The private lender should be okay with this because we talked about this plan before I bought the 1st house and there is language in the loan agreement that indicates it's okay.

But what about the IRS and the $10k I took from my Roth IRA for the downpayment on the 1st house? It was intended for owner-occupants, not investors. Will there be a penalty? Will the IRS even be aware? Has anyone does this?