Obviously cannot go further towards the lake, so something like this that leaves your existing yard height untouched. You'll have to leave part of the wall, so demo from the blue back.

So now adding the parcel allows you to extend a better garage solution to the side, or has that project been buried?

We are actually going to add a guest cottage instead of garage (the plans are already drawn up) which will answer our space needs and add more value to the house. First we have to bring in the dirt to level out the land between the two pieces in a way that the dirt won't wash out on the piece of land that does not have the bulkhead .

Also the first cottage will be on pilings connected to the pool deck so the addition won’t affect trying to level out the two lots.

Are you working with a general contractor and architect now? They should have referrals for this kind of work. In my area, the local codes for landscape work are quite specific about what can be done with surface water flow on adjacent properties. Your new guest cottage may have to have retaining walls and new drainage routes nearby. Since you've got permits for new dirt already, you can check with city hall to see what local codes are.

Is that a drain that I see in the fourth photo posted? I agree that you need to look at local rules for draining fresh water run off into sea water/marsh areas.

No that isn't a drain. We do actually have a drain in our current bulkhead for a fresh water spring that runs near our current house. We have already received permission from city and a permit. The city just required the temp. fence to keep dirt from washing into marsh until the hydro seed takes hold.