@Luke Tetreault - The other two members are correct, but I will add that you should be careful if you are doing multiple flips the IRS may eventually view you income as ordinary instead of capital gains.

Based on your tag line, it appears you are a big SDIRA supporter and I would agree owning instruments that pay interest which is taxable as ordinary income in SDIRA is a good use of an SDIRA. 

It's his problem and it's beyond ordinary wear-and-tear.

Is John's "paper income" of $19,102 taxed as a Long Term Capital Gain at the end of the year or is it just ordinary income taxed at whatever his rate is personally?

Just add the property taxes into the ordinary expenses of the property when you are doing your calculations.

If anything, sometimes it can be more tax advantageous to invest outside of an IRA since there are more, cheaper, tax alternatives since anything that comes out of an IRA is taxed as ordinary income.Consult a qualified professional... 

Now is a good time to look at the whole deal and make sure of all the underwriting.................Ignore ordinary appreciation completely; unless you can improve the property and raise rents creating forced appreciation there may not be any. 

In my experience, there's a very good chance that the Tenants were problematic over the years, the PM hasn't inspected in a long time (if at all), and there's damages beyond ordinary wear-and-tear to deal with.There are many ways to skin a cat, but I'm sharing my experience on what the best option is.

So, your realized gain is in pieces, and the interest you earn is just ordinary interest. 

Your net earnings will be ordinary income and taxed at your effective tax rate.