I selected the no level requirements option and now all items, including the crafted yellow items are showing as level 1. This is breaking the upgrade rare item option as it requires a level 70 item for the upgrade.
No it does not, as this has been mentioned and verified. The display shows level 1 but the item is whatever level it was when found/crafted, so if you go to Haedrig and make a L70 sword, for example, it is still level 70 and can be upgraded… even if it can now be wielded by anyone of any level.