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?

[Linda Weygant]

Originally posted by @Chris Seveney:

Ned Gorges not sure how cash flow is $7k if expenses are $35k and rent is $40k, but it all depends on if you are using an llc and is it a pass through or is it in your personal name.

Nothing could be further from the truth. There is literally no difference on your tax return if you hold your properties personally vs in an LLC. The structure, and even the forms used, are exactly the same. There is nothing that an LLC gets you from a tax standpoint that you don't get when you hold the properties personally.

Holding property in an LLC is purely an asset protection plan, not a tax structure plan.

It's possible to have a difference between cash flow and profit when you factor in Capital Expenditures and Mortgage Principal paydown (which affect cash flow, but not profits) and Depreciation (which affects profits, but not cash flow)