if you have rental real estate and the settlement only involved this property then the income is taxable but the legal fees are deductible. if it involves both nonrental and rental real estate then the settlement is taxable but a portion of the legal fees allocable to nonrental real estate is not deductible.
see this IRS web page
https://www.irs.gov/government-entities/tax-implications-of-settlements-and-judgments
