Because you received a 1099-Misc, you will report the amount in Box 3 as Income; however, you will also make an 'adjusting entry' to offset the income.
The net effect will be no taxable income; just reporting.
Type '1099-Misc' in the Search area, then 'Jump to 1099-misc'. Enter the 1099 info and Continue to a page 'Does one of these uncommon situations apply?' and choose 'lawsuit settlement'.
Then under Wages & Income, scroll all the way down to Miscellaneous Income, 1099-A, 1099-C. On the next page, scroll all the way down to Other Reportable Income. Under Other Taxable Income, you can enter 'Rental Property Cost Basis Adjustment' (or something to that effect) with a negative amount to offset the 1099 income.
Be sure to keep this info as documentation for your Cost Basis adjustment to your rental property when you sell it.
Here's more info from IRS Pub. 4345.
@dawnschen
**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"
