After expenses and mortgage, I end up with a net cash flow of anywhere b/w $150-$250 which I find rather small, and I wonder if this could even get eaten up by tax filing time.

There are also tax issues. 

Is it worth waiting until September and hope the market is still as strong or take the hit on capital gain taxes and sell now.Secondly, if we do hold this property would it make more sense to prioritize debt paydown (instead of investing in another property, put our cash towards our mortgage payment and have it paid off within 10 years.

I am looking for best practices both from a legal protection standpoint and from a tax advantage standpoint.

Depends on what your GOALS are. do you like not being tied to the burden of debt service every month & sitting on equity?

For property owners with out-of-state investments, is it necessary to keep all receipts and invoices for write-offs during tax season, even smaller jobs performed by the PM's handyman?

I do my own taxes so I can see my taxable income reduced every time I add a property into the tax return form.

As long as you have positive cash flow on debt that is tax advantaged you are not over leveraged.

The burden of proof would actually be on the claimant in this case however, not the defendant (your comment makes it sounds as if the defendant would have the burden of proof which is technically incorrect).

Taxes!