Any amount under $920k in your example would be taxable. 

If you realize profit, sales price - purchase (and some adjustments for closing costs and capital improvements), you have taxable income. 

I read that CC cashbacks/rewards are not taxable, but should reduce the expenses allowed for deduction.

PALs fundamentally work by allowing investors to deduct depreciation from their properties, which can significantly reduce the taxable income generated by these investments.

You have $40,000 of positive taxable income on two rentals after depreciation?

I generally max 401k, max backdoor roth ira conversion, max hsa, taxable brokerage, kids 529 through the state, then invest in RE with the leftovers.

Banks and realtors treat it like any other form of cash.There are tax implications for creating this correctly, so best to go with an agent who is familiar with it, otherwise you could end up with a MEC, which becomes taxable.

I thought that, at least I could deduct property taxes, Interest, PMI and Home owner's insurance.I am being told that, basically, we have to treat the entire rent check as taxable profit because of our income.

Our taxable earned income from our employment will be approximately $85,000. 

Most states do not factor in losses from other states when calculating their taxable income.However, yon't think you lost out on the state where you have a loss. that state will normally treat that as a loss that you can use in the future when you sell the property or have rental income.