Refund the money via Paypal – this will allow you to recover your Paypal fees.
Send the buyer a nice message saying that you would like to cancel the transaction.
Then via the ‘resolve a problem’ option send through the request to cancel the transaction.
The buyer should hopefully agree to this so you will then recover your EBay fees, so the only money you will be out of pocket for is the listing fee (if you paid one) – there is no way to recover this money.
If the buyer doesn’t respond to the request EBay will automatically close the case after a certain time & you will receive your costs back.
You are now free to re-sell the item.
Only other point to note is that the buyer can still leave feedback (including negative if they deem it necessary)