Sorry, but I believe that you should be on the hook for the $500. That's exactly what the deposit is for.
I learned an early lesson about people who back out of a rental as a budding student "landlord" many years ago. I had rented a three bedroom house, and sublet two bedrooms for $150/mo each (yeah I said it was a long time ago!).
I had a prospective tenant who loved the place, had great references and seemed very nice. She agreed to rent a room. I asked for $400 (first and last month plus deposit), but she only had $75 and said she would pay the rest the next day. She left a few boxes of stuff, so I believed she was serious about the room, but then she disappeared.
Three days later, she came back to retrieve her stuff -- "So sorry, I found a better place, can I have my $75 back?" I let her take the boxes and kept the money. But the delay caused me to miss that month's renting cycle -- it was too late to get a renter for the 1st of the month so I lost an entire month's rent of $150. Not to mention the lost time and aggravation of having to start all over with viewing appointments etc.
On top of all that -- that girl returned later WITH HER MOTHER to accuse me of dishonesty for keeping the $75! They argued vehemently, and with condescending moral superiority, that she should pay for a maximum of 3 days rent, or perhaps less since the room was occupied by boxes rather than a person.
After that incident, I made sure that prospective tenants (1) paid up front and (2) explicitly agreed to forfeit the first month's rent if they backed out.