There are three ways to deal with this.
1. Contact the payer and try and get the form rescinded.
2. The tax instructions say that if you receive a 1099-MISC in error, you don't report it as income. You will need to file by mail; you can't e-file. Attach a copy of the 1099-MISC to your tax return along with a written statement explaining why the income is not taxable and the 1099-MISC was entered in error. In your case, you would explain that this was a settlement for lost value of your home in a mistaken foreclosure; that the settlement represents a capital gain on your home; that you qualify for the $250,000/$500,000 exclusion based on your ownership and residency; and that even with the settlement included, your gain would be less than the exclusion amount, so it is not taxable.
The IRS has been known to lose such letters, so keep copies of everything in case they send you a letter later wondering why you didn't report it.
3. You can report the $85K as taxable income, then go to the "other income" section and create an item with an offsetting negative amount (-$85K) and then e-file your return. I personally don't like the idea of adding fake information to a tax return just to get it to e-file, and we have seen occasional reports that the IRS will send letters asking for an explanation. But the procedure does exist and can be used if you want to. I think @Hal_Al has a walk-through of how to do this in the program.
