AGI over $150K. What do you pay taxes on?

[Account Closed]

Seeking some clarity....  If I have an AGI over $150K (lets say 39.6% tax bracket) and I own a rental property with figures as follows:

- Annual Rental Income: $40K

- Annual Operating Expenses/Mortgage Interest/Depreciation: $35K

- Annual Cash Flow: $7K

What do I owe taxes on?  Do I have to pay IRS 39.6% of my $7K cash flow, OR the $5K difference between my total income & operating expenses?

Or something entirely different I've missed?