1099 MISC box 3 Builder Error

[techfam22]

We built about two years ago. Unfortunately, there were issues, that were only discovered after.  The builder acknowledged it and gave us a check to utilize for fixtures on this. There was no lawsuit involved. We received a 1099 MISC with Box 3. It technically is not income, as a portion of this will be used to fix the errors. We have not fixed it yet as we are living with it until we have to. Is it true that I have to pay taxes even though it was due to the builder having incorrectly installed items on my house? I have a letter from the builder stating what the check was for.

[OldTaxDude · Accepted solution]

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.