Hi! Goutham, You can create a half wall separator or use of stained glass is a good idea or even use old rustic wooden panels which are foldable... You get lovely stuff in the market these days or checkout urbanladder.com

I'd do option 2 myself. Technically I see an option 3- putting the couch out in the open, diving the two spaces. Couches don't need to be on a wall- you'd just need a smaller couch to do that and still have space to pass through to the other room.

I feel partitions are not needed. You already have too much for the space. Adding a partition will shrink the space further. The simplistic solution, you do not wish to discard any furniture would be to paint all the walls in lighter pastles. And use some wall painting frames to highlight certain walls.

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