Builder lawsuit settlement

I would deduct it from the basis. After all, what you got was a refund.  i also would allocate it all to the building since I doubt there were any land defects.

You don't add it to the basis, you subtract it from the basis.  Presumably, if you have had to make repairs or improvements because of the defects, those costs were already deducted or added to the basis, and this will offset that.  

Alternately, if you don't want to reduce the basis, and if you did already make repairs that you deducted, then you can treat this as a taxable recovery  (reimbursement of a previously deducted expense).