Cade ... there are a lot of helpful answers in this post. A lot of people think short sales are a quick fix. It does not sound like you are looking for quick fix. You've been dealing with a $500 deficit on your rental property and for most people $500/mo is big. Here's my recommendation:
1.) Talk to your CPA (good point Keith). You do get to write off depreciation, interest, etc from your rental property. Maybe even think about whether your maximizing your write offs. Are you keeping good track of everything you spend on the rental home. There is a lot to consider at this stage also. Like how are you paying for the $500 expense? Does your paycheck cover it, are you draining your savings, taking loans from 401(k)'s, cashing in other assests to make it every month?
2.) If after CPA you determine it still isn't working, aboslutely talk to the lender and see what they can do in terms of a loan modifiction. This may save everything until you sell it for what you need out of it.
3.) If loan modification doesn't help, your draining your entire life savings, CPA says it doesn't make sense, then I wouild at least consider a short sale. While damaging to credit it's not as damaging as a foreclosure. And as you can see, if you've exhausted all your resources and the banks can't help with loan terms what else can you do? Don't let anyone try to make you feel like you're opting for the quick fix. There is nothing quick or easy both financially and personally about dealing with a problem like this. I've helped many people with short sales and it's heart breaking, but when it's over there is a huge sigh of relief.
If you know there is no way you can continue and you are on the verge of missing payments, absolutely consider a short sale. Speak with your lender, hire an experienced short sale Realtor and get the home on the market. Don't let thing gets too far ... be proactive.