I would ask the city if they intend to pay you a yearly rent for use of the sidewalk, and if not, that they issue to you a 1099-S in place of the 1099-MISC or at least file a corrected 1099-MISC and enter the payment in Box 3 as "Other Income"
In TurboTax you would then enter the 1099-MISC and next repeat the process entering a negative amount and a description of "City Easement" to cancel the income.
Normally an easement reduces your basis in the property. For example if you purchase a home for 300,000 and an easement payment is 5,000, your basis is reduced to 295,000. This reduced basis is used when the property is sold if capital gains is recognized.
Contact the city to understand if they see this easement as something different. I would guess the city staff incorrectly entered the amount as rent.
According to the IRS:
“The amount received for granting an easement is subtracted from the basis of the property. If only a specific part of the entire tract of property is affected by the easement, only the basis of that part is reduced by the amount received. If it is impossible or impractical to separate the basis of the part of the property on which the easement is granted, the basis of the whole property is reduced by the amount received.”
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