Reciprocal interactions between alveolar fibroblasts and epithelial cells are crucial for lung homeostasis, injury repair, and fibrogenesis, but underlying mechanisms remain unclear. To investigate, we administered the fibroblast-selective TGFβ1 signaling inhibitor, epigallocatechin gallate (EGCG), to Interstitial Lung Disease (ILD) patients undergoing diagnostic lung biopsy and conducted single-cell RNA sequencing on spare tissue. Biopsies from untreated patients showed higher fibroblast TGFβ1 signaling compared to non-disease donor or end-stage ILD tissues. In vivo, EGCG downregulated TGFβ1 signaling and several pro-inflammatory and stress pathways in biopsy samples. Notably, EGCG reduced fibroblast secreted frizzle-like receptor protein 2 (sFRP2), an unrecognized TGFβ1 fibroblast target gene induced near type II alveolar epithelial cells (AEC2s) in situ. Using AEC2-fibroblast coculture organoids and precision cut lung slices (PCLS) from non-diseased donors, we found TGFβ1 signaling promotes a spread AEC2 KRT17+ basaloid state, whereupon sFRP2 then activates a mature Krt5+ basal cell program. Wnt-receptor Frizzled 5 (Fzd5) expression and downstream calcineurin signaling were required for sFRP2-induced nuclear NFATc3 accumulation and KRT5 expression. These findings highlight stage-specific TGFβ1 signaling in ILD, the therapeutic potential of EGCG in reducing IPF-related transcriptional changes, and identify TGFβ1-non-canonical Wnt pathway crosstalk via sFRP2 as a novel mechanism for dysfunctional epithelial signaling in Idiopathic Pulmonary Fibrosis/ILD.