Update: I got the XS500 rear wheel on and working pretty good. Here's how I did it:
Used what I was told was a 1976 XS500 rear wheel without an axle or rear disc. I paid about $92 shipped. This thing is heavy...
I ordered new bearings from Pyramid Parts in the UK (1x 6205 2RS (25x52x15mm) 1x 6204 2RS (20x47x14mm). The XS500 axle sleeve is the same length as the XS650 sleeve so I used the 650 sleeve from my 16" wheel. I also used the axle, right side spacer, left bearing "hat" and rear disc and caliper.
For the sprocket I followed the advice above and got a 32T 530 four-hole sprocket and drilled the mounting holes out to 12mm. Easy peasy.
The sprocket will line up pretty good by centering the wheel but there will be an additional space of 10mm between the caliper holder and the chain adjuster. On the sprocket side the gap is 22mm. This is using the 650 wheel spacer between the bearing and the caliper mount. Unfortunately the spacer is approx. 2mm too thick which causes the rear caliper to bind up. I comped for this by moving the rear disk 2mm out using washers. Seems to line up OK now. Ideally, I think it would be better to take 2mm off the spacer. I used XS500 seals which fortunately have a 1 1/4" and 1/18" ID. My spacers which came from Old School Mike on eBay came with those ODs. But you have to specify to Mike when you order. He was great and the spacers were perfect (~$20).
Finally, by moving the caliper over 10mm the brake stay no longer lines up. After considering all my options (cutting and welding, fabbing a new stay, attaching to the other side of the bracket, etc) I decided to try a slight bend on both ends. Worked perfectly and the bends are almost imperceptible.
Spacers:
Rear caliper bind:
Really happy with the results. Plus now my kickstand works again. Not sure what the final gearing is now. I went from 17/34 on a 16" wheel to 17/32 on an 18" wheel. Since my rev counter is all over the place I'll have to rely on the butt dyno.
Now it's on to seat and tank.
