82 rabbit may need engine, I need advice

My one owner 1982 rabbit cabriolet with 185K made a couple loud clanks while fast idling and stopped. It was loud so I thought it threw a rod or broke the timing belt. It was however able to crank and sounded like it was out of gas or no spark. I checked for fuel and spark which there was both. I checked inside the fuel distributer which smells normal like fuel and even tried ether (which worked well for vapor lock problem years ago). The distributer rotor was found to have a big burn crater midway along the conducting arm. So, of course I replaced the rotor, cap, and wires. I could see spark but still it would not fire. It had not passed emissions for several years and I knew it would be needing an engine anyway. It should run but the loud clank is a mystery. The car otherwise is very solid and in very good looking condition with new top, tires, paint, and clutch, gas tank and fuel lines. I'm considering getting a used or rebuilt engine or rebuilding this one. I wouldn't do it myself however. I see a lot of modded rabbits online so I know there are experts out there. I am a rabbit amateur but I'm devoted. My questions are mainly what is the best engine option and what should it cost. I would like to be able drive it to the shop. I'm not in a rush and can afford about $1500 but of course I'd like to go the cheapest route. I'm in San Francisco where this is a common car. Thanks for reading and will greatly appreciate any advise.

Do a compression check.

Do a compression check.

Thank you. Did the compression. It's good. A mechanic friend looked at the no firing issue and said there was no signal from the Hall effect. I swear I saw spark before. He convinced me to buy a rebuilt distributor for $200. It's not in yet.The funky clank it made has me concerned that I may have just blown $200. I'll post an update.Thanks again.

Is it running? Get a G-60 turbo swap for it... Lightweight and faster than a VR6 if done right. In a lightweight rabbit with the smaller G-60, you will fly past VRs.