Here's the deal.
When it comes to rental property, all income received from all sources for any reason is rental income. Period. End of Story.
The 1099-MISC issued to you is flat out incorrect. You need to inform the issuer of this. If they want to disagree with you, then by all means refer them to IRS Publication 527 page 2, third column under "Rental Income". I clearly states,
"you must include in your gross income all amounts you receive as rent. Rental income is any payment you receive for the use or occupation of property. It isn’t limited to amounts you receive as normal rental payments."
Add the amount in box 3 to the amount in box 1. That will be your "box 1" amount that you will actually enter into the TurboTax program. You will not enter anything for box 3, anywhere on your tax return.
