Just noticed that the rear bumper has rubbed a few spots along the rear quarter panel down to the metal which in turn has started to develop a little bit of rust. I see a few small bubbles of rust below the surface. Was wondering what the best approach would be to fixing this area and having it blend into the rest of the paint. I know that if I mask that area off and then paint it, once I remove the mask there will be a ridge where the old paint and the new paint meet. Thanks for the help.

Once you actually repair that area by grinding down etc. you'll have to have it paint all the way up into the roof. You have to paint 1 panel at a time and since its all conected, all of it has to be painted or cleared.
Unless your ready to paint both quarters and the roof, I would just remove the bumper, only sand down the rusted area, maybe use a pointed bit on a dremel?, and fill it in with black POR15. That will stop the rust and it won't be as noticable as going to town on the area with a grinder.

in a perfect work that is right that is the best way to do it (paint to an edge all the way around) however its not always the case. this id not a DIY thing so much especialy because your car is Black, But it can be spot repaired, which it fixing the area them painting only that area without making on the panle itself (just edge'*) them ones you have painted the area you would spray ablending reducer over all the "dry" edges to "melt" them into the old paint and smooth out.

Or the whole quarter can be painted and have just the sail panle clear blended using the same technic. unfortunatly non of these repairs will last more then say 3-5 years, which is why painting to an edge it the most ideal way to paint any car.

I beleave both Handdrumman and Bandit can show you pics of there sail panles and how the blend has now failed and looks very bad.

So the best thing to do is remove the bumper, repair the bad areas and then have both qtrs and the roof repainted and cleared? Too bad our cars don't have joints between the roof and qtr panel. I was afraid of this.

The area to be finished is right where the side bumper (where the red reflector) meets the qtr panel so maybe I can repair that area and then get a piece of black rubber edging and run it along that edge on both sides so it'* even?

no yo ucan do just the quarter but it will only last a few years, sometimes you get lucky and it last longer then the 3-5 years i said earlier. and paint technoligy is improving these days so maybe the stuff that gets done now will last longer then the stuff sprayed before thats failing now.

I wouldn't go to that extreme. If it'* just a small spot I would fix it and just paint that small area. If you do the entire quarter to the roof and it doesn't match or fails later on your car will look horrible. If you just do a small area no one will even see it anyway.