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Maybe it’s easier to get it even if you are able to get the wheel turning and you hold your hand condtant posistion when you sanding? You will have better controll?

Before assuming the drum is shot, try looking at comparable rear wheels on eebbaayy. KZ550 & KZ650 especially the 650-CSR. most of the CSRs have wire spoked wheels, but the brake drum is pretty much identical where it matters, ie, the lining.

I'm no expert by a long shot, but some of the rustiness you're seeing could be glazing of the lining material.
maybe it looks worse than it is? perhaps???

Install new brake shoes if you don't know the age of yours. most guys prefer oem when available, but I installed Vesrah VB-412.

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I’m installing new brake shoes with all the parts I ordered, EBC. Couldn’t find anything else for a decent price. I think I’m just gonna end up sanding down the surface rust, and continue to look for a wheel. Man, I wish I got a model with rear disc brakes.... anyone hear of a drum to disc conversion?

Ive got the same year/model as OP and my drum is grooved but functional and very nearly out of spec. Im also considering a disc brake conversion. I wouldnt mind a slightly taller rear wheel, but i do want to keep the look of the factory cast wheels. are any of the gpz550/kz550 etc non ltd models a straight swap? Ive been researching the other displacements and it seems the swingarm pivots arent the same width/diameter unless someone knows otherwise.

Swopping from drum to disc is not straight forward. Brake pedal assembly, rear master cylinder, frame mounts for the master cylinder, all the pipe work and mounts/clips, rear caliper and mounts, wheel spacers, hub, disc. Just the things that are obvious.
Probably the easiest swop would be a complete rear end swop from somthing that has disc rear but you still have to think abount rear master cylinder mounts and pedal work.

By Tbug15: Ive been researching the other displacements and it seems the swingarm pivots arent the same width/diameter unless someone knows otherwise.

From the diagrams at Partzilla the 1981 550-D1 GPz has the same swing arm shaft as the 550 Ltd. The Ltd has a fat rear tire, so a GPz swing arm could be too narrow, but they have the same axle, so maybe not. ??? . I would compare the frame & RH muffler stay since some of the brake components are connected to the stay. at the minimum the Ltd frame is probably missing the mounting point for the Rr br mc.
KZR 550-D1 pic. scroll down.

Whether or not the swap can be done on your bike, I don't know, but the 650-CSR can be easily converted to a Rr brake disk as it has the same frame as the 750H Ltd, so it's just a matter of rounding up & swapping the parts.

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