I think what's tripping you up is the sale price, not the basis.  The 1099-S is just somebody's way of trying to trick the mortgage lender (which now puts you in the position of trying to trick the IRS).  The amount realized on the sale was $260K.  The bogus 1099-S number of $430K minus the "gift" of $170K = $260K.  Basis is $150K.  Gain is $110K.  See 1.1001-1(e).  They could spin it as $999K sale and $739K gift, the amount realized on the sale is still $260K.

New owner paid $260K, that's their basis.  See 1.1015-4.