Depends on what year his Chevy stuff is out of, but my best guess is that it is a PSD. He didn't say what rear axle he has. Some of the 86 Cj's come with a Dana 44, While others had the AMC Corp 20. The 20 isn't a bad axle, if you truss it and put in one piece axle shafts. Drive shafts being right length is doubtful. Also, IIRC the rear output on the 205 is different too. Some had slip yoke, some have a flange. The 205 sucks as far as gearing, but there is an 3:1 kit out, but I think expensive. As stated above I would go with the 300 and an adapter. Although, there is a 203 to 205 doubler that is massive strong. But I am sure that would way too long for a stock CJ-7.
Another thing to figure in is if the 350 is carborated or FI.
The T-5 isn't too strong of a tranny, a better choice would be a T-176
With fuel going like it is, I would be tempted to stay with the 2.5
OK so I have confused you enough
Good luck