There's a fair bit of confusion around how item level of end-game rewards works in Legion - understandable, since we haven't really gone into detail about how the system works, instead focusing on high-level goals and philosophies. Let me take a crack at changing that.
Scaling vs. Static Item Level - "Anything Can Happen"
This came up in the first Legion Q&A a couple of weeks ago, but in past expansions, the endgame item structure has always been defined by a rigid series of flat plateaus. In Warlords, Normal dungeon loot was Item Level 615. Heroic dungeon loot was 630. Normal Highmaul was 655. And so forth. Once you had Raid Finder gear or better, there was zero value to items from dungeons. In patch 6.2, Tanaan Jungle only offered Baleful items that could be empowered up to item level 695. If you were a Hellfire Citadel raider, setting out to do Tanaan dailies (to unlock flying, let's say), there was zero chance that anything could happen during that play session that might make your character stronger. And in a game underscored by progression, that's a shame.
In essence, Legion changes those flat item-level plateaus into peaks that taper up to a global max potential item level.
When you earn an item from nearly any endgame source (dungeon, raid, world quest, PvP strongbox, mission, etc.), it has a chance of upgrading its quality. When looking at information on your rewards in sources like the Dungeon Journal or World Quest display, you'll see these items with a "+" next to their item level, indicating this chance to upgrade (e.g. the Dungeon Journal for Heroic Legion dungeons showing "Item Level 825+").
While there's a bunch of math behind it all, this may be a useful way of thinking about it: When generated, these items have a chance to roll a +5 item level bonus. If that roll succeeds, the system rolls again for another +5 bonus. If that succeeds, it rolls again. This process continues until an upgrade roll fails or the global item-level ceiling is reached. That's it.
And so, in Legion, even if you're a raider, if your friend is looking for someone to queue Heroic dungeons, you have an extra motivation to volunteer aside from pure altruism. You probably won't get an upgrade. But you might. Anything could happen.
"Titanforged" - What's the Deal?
Titanforged is just a label that applies when an item successfully upgrades by +15 or more item levels. It isn't really an inherent part of the system itself, but rather something we added midway through development to make it clear when you just got exceptionally lucky.
RNG, Progression, and Prestige
A frequent concern with the Legion item system is that the very possibility of a Mythic-raid-quality item coming from a quest or dungeon boss cheapens those rewards. But there's a huge difference between a single Mythic-quality item and a full set of gear of that quality. A player who mainly queues for Dungeon Finder and Raid Finder may end up with a couple of great raid-quality pieces, but that's a far cry from what someone who actually does high-end raiding will look like. Ditto for someone who casually queues for BGs compared to a top-rated arena player. After all, it requires far fewer lucky breaks for a Mythic Nightmare raid drop to make it to Item Level 895 than it would for a Heroic dungeon blue, by a huge margin. Your overall gear will still reflect the type and difficulty of content that you do, but a broader range of activities can be rewarding, and a broader range of players can have moments of surprise and excitement along the way.
Another concern raised in this thread relates to the impact of randomness on competitive progression. First off, the explanation above references a "global item-level ceiling" - that's simply a cap on how far any item can upgrade, and it's a value that will be set in relation to the highest available base item levels from the most difficult available content. Once Mythic+ dungeons and the Nightmare Raid are accessible, that value will be 895 (and that's the value to which the cap is currently set in beta). But for the first couple of weeks after launch, we're planning on having a lower cap in the 850s, since there is nothing available above that base item level. In the future, as new content is introduced, the ceiling will rise accordingly. Even the very luckiest person in the world won't be walking into raids and outgearing them on day one.
Finally, we're dealing with upgrade chances on individual item slots out of 16, belonging to individual characters out of 10-30 in a raid group. A single item won't make or break your raid's success. The law of averages suggests that raid groups that complete roughly the same amount of content will end up with roughly the same item level. We feel that the system will be a significant improvement to the individual gearing experience without harming guild competition.
My main question was - will Heroic and Mythic raid gear be able to upgrade past Warforged?