So Faction Neutrality is a hot button issue.. so I brainstormed/armchair deved some ideas for discussion and made a poll that will eventually turn into why Sylvannis is Danusars waifu and why Ion's head belongs on someone's mantle because this is MMO Champion.
Option 1: Everquest style!
So for those of you who haven't played Everquest, EQ had a multitude of races and some of them hated each other. Dark Elves couldn't just walk into Freeport, Iksar were hated by anyone NOT Iksar, and Humans couldn't walk into a Troll village without being viciously murdered. HOWEVER you were allowed to group with them despite these differences. WoW I think could adapt this style pretty easy. Lore wise it's simple, Tyrande can hate Bob the Undead priest all she wants and Lorethemar can totally hate Steve the Night Elf Death Knight for existing. HOWEVER Steve wants a healer and Bob is a good one so he's willing to look past that. Where lore fails RP prevails! As such Steve invites Bob to his guild and he now raidheals for him just fine. Bob however cannot enter Stormwind and will still be killed on sight. Steve on the otherhand will be murdered viciously for even walking over to Durotar. This way the faction war is still represented in the story, PVP remains the same and only difference is you can talk to each other and throw insults and the PVE part is happy. Arena can be cross faction (since faction conflict barely exists in Arena anyway).
Option 2 Pandaran/Covenant Style
So to preserve the faction war why not remove the race barrier? Say anyone at level 10 after the initial leveling can choose Horde or Alliance. You would have humans in the Horde and Orcs in the Alliance if they so choose. Make it better by offering a Covenant style, very annoying, 2 week cooldown quest to defect if you so choose (with the option to pay to change intact). This way the faction war is intact, lore barely makes sense anyway, and you can be whatever race you want and stay with your friends!