There are two ways to handle this in turbotax.
1. Enter the 1099, then create an item of "other income" in a negative amount to offset the 1099.
2. Leave the 1099 off your return. Print your return and file by mail, and attach a copy of the 1099 and a written explanation of why it is not taxable income.
People like #1 because they can e-file but I would find it hard to believe the IRS doesn't send letters to such people. #2 will usually avoid another IRS letter (unless they lose your attachment) but you can't e-file. In your case, I favor #2 even more because you have two issues; the income is non-taxable to begin with because it is a basis adjustment to your property instead, and the 1099 is issued in the wrong amount to the wrong people.
But if you take #1 and get a letter, you will be able to answer it with your story and proof.
