It's all about the nuance of what you demonstrate by your behavior.Holding time is not the gold standard for 1031 exchanges but depending on your business model the holding time absolutely can be used to change recognition of gain from ordinary income to a capital gain - talk to your accountant to see where you would fall.Most industry professionals are not overly concerned with holding periods of greater than one year qualifying appropriately for 1031 exchanges.  

Here is the situation I will receive a bonus check from my W-2 job and for numbers sake we`re gonna say its 50k, now according to the IRS my employer will withhold 25% in other words 12500$ for tax purposes.

I agree that a lot of people are creating LLC's for investments, that if they analyzed their potential risk and considered the liability coverage they might be receiving from - their individual property insurance coverage- an umbrella insurance policy- property management (if they are paying somebody else for this)they might be a bit more likely to stick with holding their first few properties in their personal name.

W2s are issued by your employer at the end of every year -- they summarize your earnings and tax withholdings for the previous year of your employment.

If he makes the loan directly (i.e. personally) from Canada, there will be a withholding tax by the IRS on income earned.

I'm concerned that if I bring up the matter of withholding security deposit to cover the costs , they might cause more damage to the house prior to vacating this month. 

Make sure you take plenty of photos of every bit of damage if you decide to withhold anything from her security deposit aside from unpaid rent.

You will be responsible for factoring in the $12,500 penalty.The withholding from your $90,000 earning W-2 may be higher than that penalty resulting in a refund.

If I end up issuing this payment, do I also get the exiting tenant to fill out a w9 for their income or do we report this distribution as short term capital gains or do we withhold taxes.  

Owe nothing to anyone except to love one another; for he who loves his neighbor has fulfilled the law.Proverbs 3:27-28    Do not withhold good from those to whom it is due, When it is in your power to do it.