There are basically two ways to deal with this in TurboTax, assuming the county doesn't or isn't willing to change the form. The money is not income, as long as you paid more than $15,000 for the property. Instead, it reduces your basis, and may result in higher capital gains tax if you sell it later. You should keep records of this transaction with your other important tax papers for as long as you own the property plus 7 years after. 1. The instructions for the 1099 form say that if you receive a form in error, you should not enter it on your tax return. Instead, attach a copy to your tax return along with a written statement explaining why this is not taxable income to you and file your tax return by mail instead of e-filing. 2. Enter the 1099 as other income not subject to self-employment tax. You would do this if the income is in box 3, or if inbox seven, by answering all the qualifying questions that no this is not income earned from working, no you do not intend to make a profit, no you do not intend to do work like this in the future. Then, enter a counterbalancing item of other income with a value of minus $15,000, give a reason like "basis adjustment". This will net out the income and resultant no tax. By reporting the 1099, you avoid some of the IRS computer matching systems. However, you may get a letter asking you to explain the negative adjustment.
