Q. My sister passed away and left me $10,000 through a life insurance policy. Do I pay taxes on this?

A. You likely owe nothing if you received a lump-sum payment from the policy.

There are situations where you are required to pay, such as taking payments in installments where a portion of what's disbursed is interest on the proceeds.

You won't need to report the lump-sum payment for income purposes. Nonetheless, the IRS recommends you keep records of nontaxable income.

Q. My husband and I sold a rental townhouse last year that we bought in 1991. We lived there until 2003, when we moved to our current home. Are we exempt from capital gains? We paid $17,000 in real estate commissions to our agent. Can we deduct those from our rental expenses?

A. You are probably eligible for a capital gains exclusion since you owned and occupied the townhouse in two out of the prior five years, said David Ramirez, a former Internal Revenue Service agent who owns Tax Relief Services on South Beretania Street.

Since you are married, that means up to $500,000 of profit can be excluded in capital gains taxes. Individuals can exclude up to $250,000.

You'll need to figure out how much depreciation you claimed while renting out the property. This amount can't be counted for purposes of the capital gains exclusion.

For example, if you claimed $25,000 in depreciation during the years you rented the property and made $100,000 from the sale, you would face a levy on $25,000 and have the remaining $75,000 excluded from capital gains taxes.

The $25,000 could be liable for a 25 percent tax depending on when the depreciation was claimed, Ramirez said.

The above illustration was simplified and accounting for depreciation isn't always a black and white issue, he said. The amount can depend on when and how you claimed it.

You are out of luck if you want to claim the agent commission as a business expense in renting out of the house.

The commission is considered a selling expense by the IRS (along with advertising costs, legal fees and loan costs paid by the seller) and should be deducted from the sales price.

This gives you what the IRS calls realized amount.

You'll also want to calculate what was the "adjusted basis" of the property. This usually includes how much it costs, purchase settlement fees and closing costs, plus the value of improvements you've made to it. These can range from bedroom additions to new water heaters.

You'll then subtract the adjusted basis from your realized amount to figure out your gain or loss on the property.

In doing your taxes you'll want to check out IRS Publication 523 on selling your home. Pages 16 and 17 have some information about business or rental use of a home. As with all questions involving a lot of money, you should consult your tax adviser and discuss the specifics of your situation.

Do you have a question about personal finance, taxes or other money matters? Reach Akamai Money columnist Greg Wiles at 525-8088 or gwiles@honoluluadvertiser.com