WKelley, that is really good insight as far as deciding what to do with the car. I hadn't quite considered everything you had mentioned. Thanks for the input.
Rust is starting to develop along the hood where the rocks have chipped paint, as well as around the fenders but its not bad right now. The car spend its first 5 years in Alberta which probably helped. No other big issues, the car is at 225km... looks like it would sell for about $3,000. You are right that you won't be able to replace it with something trustworthy for under 5 grand so there we go.
Transmission mechanic just took it for a spin and said likely the transfer case. If so $1800... but he has to get it on a lift to confirm.
I'll probably consider myself lucky with an $1800 fix and I can keep it on the road for now. Baby on the way so will have to sell it off sometime in the next 12-24 months for something bigger.
Will update with the final diagnosis and bill once complete!