This is not income and you should insist the builder correct the 1099. This is merely a purchase price adjustment.
Say you buy a used car for $5,000. After a week, you realize the dealer misled you about the condition of the car and you need a new alternator. The dealer offers to replace it or cut you a check for $300. You opt for the money, buy a replacement from a junkyard for $150 and do the work yourself. That's not income. The price of your car is now $4,850.
The same applies to your house. Take what you paid for it, subtract the builder payment, and that's your basis. Add to that whatever you end up spending to fix the issue.
