We have something similar. A living room at the front of the house and a family room addition at the back. Both are fairly large. As a family, we spend most of our time in the family room. But as our son and his friends are getting older (5 year olds), we're finding that we spend time with the adults in the living room and the boys are in the family room - the two rooms are joined by the dining room and with the french doors open we can hear what's going on. I can see us spending more time in the adult space, as they kids get older and don't need as much supervision. For our style of house, one big room would not look right. So, I would also consider your overall house. Our family room has 2 skylights and is not dark.

Yes, there does seem to be some confusion about habitable rooms. For building code purposes, a bedroom/sleeping room IS a habitable space. The requirement for a habitable room cannot be met with a "vent" or an "exhaust" system; the requirement is for "ventialtion" by means of a readily accessible operable opening to the outside air OR a mechanical means for delivering outside air to the room. When "egress" is used as a general term it can apply to any way of getting out of a building but national residential building codes like the IRC have two separate sections addressing this issue. The "Means of Egress" requirement is for a single path through doors and corridors with a clearance of 36" x 80" that does not pass through a garage. The "Emergency Escape and Rescue Opening" requirement is only for bedrooms and basements. The size of the opening can differ with the jurisdiction and also for renovation vs new construction but typically it is 5 s.f. for the ground floor and 5.7 s.f. elsewhere. The maximum sill height is 44" and the minimum dimensions are 24" high and 20" wide. The den can be considered part of the adjacent space if the separation wall is half open. The bedroom requirement can be avoided by using an opening larger than a standard door 40"+. Some jurisdictions will drop the escape requirement if there is no closet. It seems to me that the building official only told you that the room cannot be used as a bedroom so tell them it is not a bedroom, find a way to supply fresh air and get a permit. A bathroom exhaust fan with an integral fresh air supply duct might be adequate. Here is a link that might be useful: energy recovery bathroom fan

We never use our formal dining room nor our formal living room. Our kitchen has a table in it and is probably about the size of your kitchen and dining room combined. An eat-in kitchen would be a great idea for you. Use the dining room as part of the kitchen and then open up the whole area to either the current living or family room so you can see what's going on in that room from the kitchen (open concept). Don't live now for re-sale later! (unless resale is imminent) Use the extra room as living or dining room, whichever you will actually use. Hardly anybody I know ever uses the formal dining room, but we all have eat-in kitchens. Since neither room has special plumbing etc, for resale it can be staged however you like. Just make it what you need for now. In my dreams, I open up my kitchen to the dining room and put in a 12 foot long island with an angle and an overhang for stools. I would keep my table in it an maybe put a little tiny conversation area at one end if I had space. I woul never miss my formal dining area, except that it looks pretty if anybody ever did go in there..

Definitely trim the trees. Not only will trimming help with natural light it will save your roof and siding from moisture which never gets a chance to dry. Most of what light you get comes from the south, but it isn’t typical southern exposure, so I suggest you treat the interior as if the light were from the north. Paint the room and ceilings a B.M. off white…Goldtone. It will give the impression of sunlight. Here is a photo of a room, in Goldtone, which is lacking in natural light. Paint the dark brick white. Add lighter fabric in the room with pillows. Choose brass for lamps and metals; put a mirror over the fireplace. Use decor which reflects and brightens. There is a floor lamps called “wall washer”, LED, which does just that…it spreads light all over the wall. Consider one for the corner to the right ofthe front window.