Rental income will be subject to a withholding tax of 30% of the gross income.

I am going to move from California to Washington State.I am considering renting out the home I own in California, but the property manager mentioned they normally withhold 7% for the CA Franchise Tax Board for out of state owners (if I understood correctly).Can you perhaps clarify how this works and which state decides how much tax to pay on rental income?

It is also subject to whatever the state tax bracket is.As with lottery winnings, taxes are withheld at the source, so usually the game show itself will withhold between 25% and 35% of your winnings and send them into the IRS for you.However, the OPs post was not about the taxes on his winnings, but rather how to invest his winnings in real estate, so we'll get back to that discussion....

When a tenant withholds rent in Chicago are they required put the rent in a separate account and show the landlord proof they have it? 

I'd be very surprised if he can withhold any of your deposit for anything except damages.

this will be dependent on how long the flip took or should take, think utilities, Hard Money costs, taxes, all the costs associated with holding the property for the flip time.Remove Repair costs: 5,000 is a nice small budget and would be amazing if it turns out to be this.  

I know it's customary not to withhold funds in these cases, even though you legally can.Why do I feel this way?

The problem with holding it in escrow is that it must be officially part of the escrow transaction and therefor it has to be put on the HUD-1 settlement.

Try to find an independent broker/company who will "hold or park" your license for a fee, then no worries about withholding information or feeling sneaky :)   In the past I've sponsored the license of investors in exchange for a yearly fee.

@Ali HashemiI vote to borrow against your 401K.You can borrow up-to the lesser of $50,000 or 1/2 your 401K balance(if your plan offers this feature).If you cash-out your 401K - you would have to worry about mandatory withholding, state withholding and penalties.