[growe58]

You have the classic symptoms of a blown head gasket. On top of that, the Toyota 3.0 inline 6 has a reputation for blowing head gaskets. So if it walks like a duck and quacks like a duck...

It can be checked with a compression test. You are right that the water in going into the cylinders but the reason that it only happens when it's running and not while parked overnight is that a) when the engine is running, the coolant is circulated by the water pump giving a continual supply to leak in and b) when the engine is running, the coolant heats up and pressurizes and is more likely to be forced into the cylinder.

$200 is a very good price for this job although I would guess that the mechanic is cutting a few corners (probably just lifting the head and dropping a new head gasket in there). Depends on how long you intend on keeping the car, a quickie job might suffice. But if you really want it to last, the head needs to be removed and resurfaced, you need to use the best quality gasket you can find and replace the head bolts with uprated ones.

Sorry to be giving you bad news and best of luck with it. Hopefully you have a good mechanic that you can trust to check it out, give you options and fix it right. Don't bother with sealants, you can't fix this with a can and may actually make matters worse.