Does the house need to be unoccupied for a follow up inspection?

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Extemely Important Question: Am I allowed to have a non-renter living in my house that is not yet a certified rental?

I am being 100% honest in what I am about to type: 

I bought my grandpa's house two years ago, and lived in it as my primary residence for 2.5 years. This January, while I still was living in my home, I took in a friend in need who was kicked out of his place of stay. I asked him if he could help pay for utilities, internet and Netflix. since his occupancy was sure to rise the utility bills. There is no formal agreement, no papers signed, nothing like that. 

Meanwhile, I have been dating someone for a while and have been really eager to move in with her. For multiple reasons it just worked out that I would be moving in with her into her house. Therefore, after about a month of living with my friend I moved much of my stuff over to her house and have been staying with her for over two months now. 

My friend still remains at my house. Since I don't want to sell the house, I am deciding to try out renting. 

I had the rental inspector come out and inspect the house. The paper says "No person shall occupy this house until a certificate of occupancy is issued." The inspector said nothing of my friends stuff everywhere and I haven't exactly officially moved out. (my mail still goes there, my license still says its my house)

Do I need to truly have the house unoccupied by the time the follow up inspection occurs? I am a honest man and want to be sure I follow the proper procedures. 

Thank you for any and all answers.

[Scott Matthew C.]

Joseph H. , I am assuming you have claimed the property as your primary residence? Just making sure even though you stated it.

Currently you’re helping a friend out. He/she pays for some bills as a way to thank you for helping him/her in a jam. You can do that. You have an informal agreement about it and nothing in writing regarding renting your house. You’re helping out a friend. Period! This is where you nod your head in agreement.

So you moved out to stay with your girlfriend. There is nothing wrong with that as well.

Your drivers license is the same. Great!

Your mail is still sent to the property, not your girlfriends. Great!

You have home insurance on the property and paying it, right? Nod your head in agreement.

O.K., you had a city inspector come out to inspect the property as a possible FUTURE rental. - great job, that’s a step in the right direction IF you were to no longer claim the property as your primary residence and to operate as a business! ***Important*** As of right now, if I go down to the register of deeds and the tax assessor... will I find that you have claimed the property as your primary residence at 100%? If yes, then you are within your right to help out a friend who is in a jam and happens to pay some bills as a thank you.

However, the second you claim any rent checks is when you become a landlord. It will be regarded as operating a business! You will be in violation with the state, county, city, and federal including the IRS.

The city inspector must grant you “Certificate Of Occupancy” as a rental. NO one can be living in the property until you get the C of O.

Right now, your helping a friend and the friends stuff was there when it was inspected, not a big deal. The inspector could assume you were operating as a business/rental and could report it, but you live there and helping out a friend, FOR NOW.

It is obvious you want to make this a rental. Do it the right way and follow the state, city, and federal formalities.

For starters Quit Claim the Deed to an LLC.

I hope this helps!