Legal Question in Tax Law in New York

As a general rule, the only type of judgments which are not taxable are judgments for physical pain and suffering, so damages for the lost use of real property would be ordinary income to the recipient.

If you also received attorney's fees as part of the judgment, the good news is the fees would also be taxable to you but offset against the actual legal costs incurred. The bad news is it would not be a complete "wash" because the costs incurred would likely be deductible to the extent it exceeded 2% of your adjusted gross income as a miscellaneous itemized deduction. Unless the judgment was with respect to one of three specific types of actions enumerated under �62(a)(19) of the Internal Revenue Code (generally an unlawful discrimination cause of action, a claim against the US government in violation under Chapter 37 of Title 31, or a private cause of action against the government under the Medicare secondary payer statute), the rule is the ability to deduct the costs would be limited and a portion of the award for attorneys fees would be taxable.

Finally, to further rub salt in the wound, miscellaneous itemized deductions are not deductible for alternative minimum tax ("AMT") purposes, so you may be further penalized to the extent the award pushes you into the AMT.