Hi Celeste,
Whilst I usually feel that honesty is the best policy, I can see the potential for a big issue here, especially since you live together. Do you and J have a general guideline about not dating each other's close friends or colleagues? For some people, this isn't an issue. I've even known of people who prefer it, because they feel that all their favourite people are intermingled.
If you do think it would cause difficulty, I think that you only have two options. The first is to tell J how you feel, so that it is all out in the open. The second is to never mention it; but if you do this, you have to ensure that any secret discussions and flirtations immediately stop and that both of you just leave it alone.
From a personal experience standpoint, my girlfriend and my best friend (who was once a very special long-term boyfriend) had a little 'thing' together that hugely dented the trust in our relationships. They felt an attraction and though I had said that it was a hard limit for me, they chose to start calling each other and flirting heavily online in secret; admitting their attraction to each other and choosing to hide it from me. This only went on for a few days, before I discovered an email. I then asked to see the other emails and Skype logs and was definitely not happy about what I read. Had they both come to me, perhaps I could have gotten around my own limit, or perhaps they wouldn't have been quite so tempted by the whole thing once it was out in the open. Either way, it would have been far better than what happened.
There's a difficult grey area when it comes to secret, reciprocal, attractions. You have to make sure that an acknowledgement of attraction does not become secret behaviour, flirtations, longing or in the worse case, some sort of emotional affair, where the two parties tell themselves that as long as nothing physical is happening, it's ok.
I wish you all the very best of luck with whatever you decide to do!