Fermion
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I'm no expert, but I'm pretty sure that step flashing along a side wall like that is the standard (probably code) way to do it. It helps keep the water from running down the wall.
A 2" gap is probably more than I've noticed. I think even a small gap is enough to let it dry out quickly, a larger gap is good for snow/ice build up.
-ERD50
It is. I used about 200 pieces of step flashing when doing the side wall to the tower and the sides of the dormer walls where they meet the main roof. You leave part of the vertical portion of the step flashing exposed also...you don't have the siding go directly down and touch the shingles lol.
It is tough building your own house but at least I know it is done right!