What's the best way to flash this difficult corner above a roof in stucco?
Cement is porous, not waterproof, it acts like a sponge and will hold water. It also allows water vapor to pass through so condensation does not build up in walls. Tarpaper also allows water vapor to pass as well but not water itself. Tyvek has the same properties too. The point I am making here is the tarpaper is your waterproofing layer and the stucco or any other masonry surface like brick, only provides protection for the tarpaper. If the tarpaper is not layered right or flashing is not installed properly you will get what you have now. The flashing prevents water from getting behind changes in plane, like a roof (sorry for the obvious). The mention about the paper going up to the top of the new extended flashing, is to treat the tarpaper install like there is no flashing there at all so the watershed properties of the tarpaper stay intact where the flashing and its "turnout" end.