An Adventure in Firsts: '83 XS650 Heritage Special Build/Rebuild

Sorry for the delay. I finished the job and then got covid shortly after. Still on the mend.

Could only get torque on rear axle to 86-90 ft/lbs; after that point I was lifting up the front end of the bike. I think I got the chain tension right but I'll check again at some point soon.
Get well soon, I hope you don't have long covid.

On the axle.......... getting it nice and tight then a solid reef. If the axle nut cotter pin hole don't line up with the axle cotter pin hole you are going to have to slacken ott the nut to align the holes for the pin any way.........So it doesn't matter how tight you get it there is every chance you will have to back it off some. As long as the nut, axle and wheel are all firm and tight it should not be able to come apart while the pin is in there. A new one is best and although i have doe it many times, the old one should not be used again. ............keep. it for a spare n your tool kit if it looks ok.............
Changing front brake pads counts as easy-peasy after all the things you've already done. If you have a drum at the rear, more of a job 'coz the wheel has to come out again but nothing difficult.

Rust on brakes not usually a problem - wears off as soon as the brake is used. Italian bikes in the 1970s and 80s famously had cast iron discs which literally rusted overnight!

But I agree with Jim that disc looks quite worn - should check the thickness and replace if it has gone below service limit, which is unusual.
The rear brake screeching and squawking is most likely a dried out camshaft pivot where it passes through the brake plate, as long as the shoes aren't worn out completely. Drum brake servicing is sadly neglected and it's likely yours hasn't been touched since the factory put it together. That cam shaft pivot needs re-greasing about every 10 years and brake screech or squawk is often a sign it's in need. See post #3 here .....

86 to 90 ft/lbs is fine on the rear axle. That's right at the lower end of it's spec range. I use this table for the '77 model for most of my torque specs because it gives them all as ranges. It's just plain silly to give a single number value for something like an axle nut that needs to be aligned for a cotter pin.

Standard practice for a castle nut and cotter pin....

Torque the nut to the lowest value.
Then set the wrench to the highest value. Continue tightening until a slot lines up for the cotter pin.
** (This step is only for critical torque items. I wouldn't bother with the axle nut.) If the wrench clicks before a slot is aligned, replace the washer with a different thickness washer and try again.