'mi' is added after what you want to emphasise, i.e. what part of the sentence you are asking.

So, the first one asks if you live in İstanbul or somewhere else. Like: "İstanbul'da mı yaşıyorsunuz yoksa Ankara'da mı?"

The second one asks if you live or do something else in İstanbul. Like "İstanbul'da yaşıyor musunuz yoksa tatil için mi geldiniz?"

Both sentence are toned differently while speaking.

So if you ask where the person lives, use the first one. If you ask what the person does in İstanbul, use the second one.

İstanbul'da mı yaşıyorsunuz? (Do you live in İstanbul?) 

When you would like to ask someone if he/she is living in İstanbul this is the correct form. The question is about İstanbul, means I'd like to know if he/she living in İstanbul or not.

 İstanbul'da yaşıyor musunuz? (Do you live in İstanbul?)

When we translate it in English it look like same. But in the second form we are considering about he/she doing the verb(here it is live(yaşamak)) in İstanbul or not.

So if the verb is live(yaşamak) then the correct form is first one. 

But let to change verb to work(çalışmak)

1-İstanbul'da mı çalışıyorsunuz? -> Are you working in İstanbul. And I want to learn if he/she is working in İstanbul or working in another city.

2-İstanbul'da çalışıyor musunuz?->Are you working in İstanbul. In this situation I'd like to learn if he/she is working in İstanbul or doing another thing in İstanbul.

I hope I was understandable:)