Jesse, the furnace needs replaced. If you didn't already know what you know, I would say buy a home warranty policy as part of the sale. The repairs would come out of that.
I think you have to disclose the condition to your friend and either negotiate an adjustment to the price i.e. a $1500 credit towards a new furnace, or bite the bullet and replace it prior to the sale (you bear the full cost to do this). Since the next owner will benefit most from a new furnace, the disclosure and credit approach helps share the pain, but you will pay your share out of the proceeds of the sale, so you will never miss it.