[jerryboie]

My balance of principal was $213,000 and the fair market value was $230,000.
Should I pay the IRS?

[AtlantaTaxExpert]

Probably not. Do nothing unless you receive a Form 1099-C.

[MukatA]

These two factors may help you
1. If you lived in the house for two years and owned it for two years in last 5-years, you may be eligible to exclude gain of up to $250,000. Your U.S. Tax Return: Profit From the Sale of Your Home

2. The Mortgage Forgiveness Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt of recourse loan on their principal residence. Your U.S. Tax Return: Foreclosure or Repossession of Main Home

[ebaines]

You have effectively sold the house for $213K, and the bank received an asset worth $230K, so there is no issue here regarding income tax on any forgiveness of debt. In general, lenders will issue either a 1099-A if there was no debt forgiveness, or 1099-C if there is debt forgiveness, but not both, so you're clear on that. Whether you need to report the sale as a capital gain depends on (a) whether your $213K sell price is greater than your cost basis, and (b) if it is a gain, whether you qualify for an exemption as Mukata pointed out.