Federal tax implication of lawsuit settlement

My taxes are generally very simple, but for 2006, there's one quirk. I received an out-of-court settlement during 2006 of about $16,000. Long story short: I bought a older home a few years ago. On the very day that the seller left the home, I went to visit the house and discovered that the roof leaked badly in more than one place. I ended up needing to replace the roof. There were other serious problems with the house, which cost me about $16,000 to get fixed. Anyways, we settled out of court last year. I essentially received the cost of the roof plus other items that needed repairs--all were mentioned in the lawsuit. How do I report this? I've heard differing viewpoints. It seems that this shouldn't be taxable, as I am simply getting my money back. Do I simply treat the money as a reduction in the sale price (thus recognizing a larger gain when I sell it)? Crazy....Thanks in advance! Interesting group!