Well, I've seen it done and it has generally worked, but I'm always a little skittish about that kind of R&R. You can shop around and get a Jasper rebuilt 350 marine short block for about $2600 +/- (with exchange) with a full year guarantee or better. And dropping in a 1986 350 for a 1985 350 sounds a bit penny wise and pound foolish in my book.
If you do decide to do it, be sure to change out the freeze plugs to brass or bronze - the OEM freeze plugs will rust out using raw water all the time. If you do not already have one, consider converting to a closed-loop cooling system if you are operating in salt water or brackish water. Even if you are operating in fresh water it's a good idea because your block and heads are getting the benefit of a coolant with antifreeze. That requires two water pumps and a water-to-coolant heat exchanger. You need one pump to pull the raw water up through your outdrive, through the heat exchanger and out the manifolds, and one to circulate coolant through the block and heads from the heat exchanger. Depending on how your current engine was set up, you may have both pumps already, and all that you need is the heat exchanger and hoses to re-rout the water and coolant flows. About every maire engine shop I have ever visited has several used heat exchangers laying around.
ALSO - change out the oil pan on the replacement engine to an aluminum one. The OEM pans have a very bad habit of rusting out in a marine environment. If your current engine has the canister type fuel filter, replace the can with aluminum or stainless. Often times a Ford can is a direct replacement (don't even ask why I know this!)
Inspect your manifolds and risers very carefully. If you are going to replace them any time soon, now is the time to do it. It is a lot easier to change then when the engine is out of the boat.
