A W-9 is just a form to collect your information. The builder may be planning to issue a 1099-MISC to report the payment as income to you.
If the amount is less than the price you paid for the home, it is not taxable income. But, it does reduce your cost basis in the home (as if you simply paid less in the first place). You may be able to increase your cost basis by the cost of repairs, depending on what is needed. Your cost basis is used to determine your capital gains when and if you sell.
How you report this depends on whether you are using Turbotax desktop (installed on your own computer) or online.
If using the desktop program, you enter the 1099-MISC as miscellaneous or "other" income. It will appear on line 8z of schedule 1. Then you go to Forms mode and make a manual entry to line 24z of the same amount, which will subtract it from your income. You can write a short explanation like "Settlement with builder over defects." This way you show the income so it matches the 1099 on file, and you show the subtraction. This is the IRS approved method.
If using Turbotax online, you can access line 24z (unless the changed the program for 2025, you could not in the past). Instead, enter the 1099-MISC as miscellaneous or "other" income. Then create another item of miscellaneous income with a negative number to offset the 1099 income. Both numbers will appear on line 8z and the negative adjustment will zero out the income to make it non-taxable. This is not strictly correct, but is the best you can do with the online program, and the IRS seems to be ok with it.
